Resources
Mortgage Glossary
The mortgage world is full of lingo and jargon. Get a plain-English understanding of the terms you'll encounter throughout your home buying or refinancing journey.
Ability-to-Repay Rule
The reasonable and good faith determination most mortgage lenders are required to make that you are able to pay back the loan. Factors include the borrower's current income, assets, employment status, and current liabilities.
Adjustable-Rate Mortgage (ARM)
A mortgage loan where the interest rate adjusts periodically based on a benchmark index. ARMs typically start with a lower fixed rate for an initial period, then adjust at set intervals. Common structures include 5/1, 7/1, and 10/1 ARMs.
Amortization
Paying off a debt over time in equal installments. Part of each payment goes toward the loan principal, and part goes toward interest. The amount going toward principal starts out small and gradually grows larger month by month.
Amount Financed
The amount of money you are borrowing from the lender, minus most of the upfront fees the lender is charging you.
Annual Percentage Rate (APR)
A broader measure of the cost of borrowing money than the interest rate. The APR reflects the interest rate plus other charges and fees, making it usually higher than the stated interest rate. Use APR to compare loan offers.
Appraisal
A professional assessment of a property's fair market value conducted by a licensed appraiser. Lenders require an appraisal to ensure the property is worth at least as much as the loan amount. Fees are based on complexity, not property value.
Bi-Weekly Payments
Half of your monthly payment paid every two weeks. In a year you make 13 full payments instead of 12, enabling you to pay off a 30-year mortgage almost eight years early with significant interest savings.
Closing Disclosure
The final document in the mortgage loan process — a five-page form providing final details about the mortgage loan you selected. Your lender is required to send it at least 3 business days before closing.
Closing Costs
Processing fees you pay to your lender when you close on your loan. Closing costs on a mortgage loan usually equal 3–6% of your total loan balance. Examples include appraisal fees, attorney's fees, and inspection fees.
Conforming Loan
A mortgage that meets the dollar limits set by the Federal Housing Finance Agency (FHFA) and the funding criteria of Fannie Mae and Freddie Mac. For 2024, the conforming loan limit is $766,550 for most areas.
Conventional Loan
A mortgage loan that is not backed by a government agency. The loan is backed by a private lender, and its insurance is usually paid by the borrower. Conventional loans typically require stronger credit and larger down payments than government-backed loans.
Co-Signer / Co-Borrower
A person who is obligated to pay back the loan just as the primary borrower is obligated to pay. A co-signer typically needs a credit score of 670 or better. If the co-signer does not live in the property, they need income that covers both their housing and the subject property.
Credit Report
A statement that has information about your credit activity and current credit situation, including loan paying history and the status of your credit accounts. Mortgage lenders typically assess the last six years of credit history.
Credit Score
A numerical representation of your creditworthiness, ranging from 300 to 850. The higher the score, the lower the lending risk. FICO scores are the most commonly used. Lenders use credit scores to evaluate the probability that you will repay loans on time.
Debt-to-Income Ratio (DTI)
The percentage of a consumer's monthly gross income that goes toward paying debts. As a general guideline, 43% is the highest DTI ratio a borrower can have and still get qualified for a mortgage, though some programs allow higher ratios.
Deed-in-Lieu of Foreclosure
A document that voluntarily transfers the property's title from the homeowner to the mortgage lender in exchange for a release from the mortgage obligation, sparing both parties from an expensive and time-consuming foreclosure process.
Down Payment
A large sum of money paid upfront in a real estate transaction. The amount is usually a percentage of the purchase price and can range from as little as 3% to as much as 20% or more for a primary residence.
Down Payment Assistance (DPA)
Assistance provided by a government or non-profit agency to a homebuyer to help with the down payment. Funds may be provided as an outright grant or may require repayment when the home is sold.
Earnest Money
An amount of money you put down to show you're serious about purchasing a home. Acts as a deposit on the property. If the home sale closes, the earnest money is applied to closing costs or the down payment. If the buyer backs out without cause, it may be forfeited to the seller.
Equity
The amount your property is currently worth minus the amount of any existing mortgage or liens. Equity is measured by subtracting liabilities from the value of the asset.
Escrow
An account managed by your mortgage servicer that holds funds for property taxes and insurance. Your monthly payment includes an escrow portion that accumulates until taxes and insurance premiums are due.
Fannie Mae
The Federal National Mortgage Association — a government-sponsored enterprise that purchases and guarantees mortgages from lending institutions to increase affordable lending. Fannie Mae is not a federal agency but operates under FHFA conservatorship.
FHA Loan
A government-backed mortgage insured by the Federal Housing Administration. FHA loans require lower minimum credit scores and down payments than many conventional loans, making them especially popular with first-time homebuyers. Minimum 3.5% down with a 580+ credit score.
Fixed-Rate Mortgage
A mortgage loan where the interest rate remains the same through the entire term of the loan. The main advantage is protection against potentially significant increases in monthly mortgage payments if interest rates rise.
Forbearance
A special agreement between the lender and the borrower to pause or reduce mortgage payments for a limited period of time. You must contact your loan servicer to request forbearance and will need to make up missed payments when the forbearance period ends.
Foreclosure
A legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments by forcing the sale of the property used as collateral. A foreclosure has a significant negative impact on your credit score.
Freddie Mac
The Federal Home Loan Mortgage Corporation — a private corporation founded by Congress to promote stability and affordability in the housing market by purchasing mortgages from banks and other lenders. Currently under FHFA conservatorship.
Good Faith Estimate (GFE)
A form that a lender must give you when you apply for a reverse mortgage, listing basic information about the terms of the mortgage loan offer and estimated costs. Lenders are required by law to provide a GFE within three business days of receiving the loan application.
HOA (Homeowner's Association)
An organization run by a board of directors elected by homeowners to oversee common assets, manage finances, enforce rules, and maintain the area. HOA dues are typically paid monthly or quarterly, separately from your mortgage payment.
Home Appraisal
A process through which a licensed real estate appraiser determines the fair market value of a home. Lenders require an appraisal to ensure the property is worth at least as much as the loan amount.
Homeowner's Insurance
A type of property insurance that covers a private residence, including the structure, fixtures, and built-in appliances, as well as liability for injuries and property damage. Lenders require proof of homeowner's insurance before closing.
HUD
The U.S. Department of Housing and Urban Development — a government agency that helps people get and maintain quality affordable housing. HUD oversees the FHA and various mortgage insurance programs.
Interest Rate
The rate of interest charged on a mortgage. Mortgage rates are determined by the lender and can be either fixed or variable. Rates vary based on your credit report, loan type, down payment, and market conditions.
Jumbo Loan
A home loan for an amount that exceeds the conforming loan limit set by Fannie Mae and Freddie Mac ($766,550 for most areas in 2024). Jumbo loans typically require stronger credit, larger down payments, and more reserves.
Loan Estimate
A three-page form you receive after applying for a mortgage that tells you important details about the loan you requested, including estimated interest rate, monthly payment, and closing costs. The lender must provide it within three business days of receiving your application.
Loan Modification
A change to the original terms of your mortgage loan that directly modifies the conditions of your loan without replacing it with a new one. Typically requires financial hardship and the property must be your primary residence.
Loan-to-Value Ratio (LTV)
A measure comparing the amount of your mortgage with the appraised value of the property. The higher your down payment, the lower your LTV ratio. Lenders use LTV to determine if private mortgage insurance is required.
MIP (Mortgage Insurance Premium)
The mortgage insurance required on FHA loans. Includes an upfront MIP of 1.75% of the loan amount plus an annual MIP ranging from 0.15% to 1.05% depending on loan term, amount, and LTV. Unlike PMI, MIP may last the life of the loan.
Mortgage
A loan used to purchase or maintain a home, land, or other real estate. The borrower agrees to pay the lender over time in regular payments divided into principal and interest. The property serves as collateral to secure the loan.
Non-QM Loan
A Non-Qualified Mortgage that does not meet the standard documentation requirements of conventional loans. Non-QM loans use alternative income verification such as bank statements, 1099s, or asset depletion — ideal for self-employed borrowers and investors.
Origination Fee
A payment associated with the establishment of a loan account, covering the cost of processing, underwriting, and executing your loan. Almost all lenders charge origination fees.
PITI
The sum of the monthly Principal, Interest, Taxes, and Insurance — the component costs that add up to the monthly mortgage payment in most mortgages. Used by lenders to determine the affordability of a mortgage.
PMI (Private Mortgage Insurance)
A type of mortgage insurance required on conventional loans when the down payment is less than 20%. You pay a monthly premium to the insurer, which protects the lender if you default. PMI can be cancelled once you reach 20% equity.
Points
Fees paid directly to the lender at closing in exchange for a reduced interest rate. One point equals 1% of the loan amount. Paying points (also called "buying down the rate") can make sense if you plan to stay in the home long-term.
Prepayment Penalty
A fee that some lenders charge if you pay off all or part of your mortgage early. Not all mortgages have a prepayment penalty — check your loan documents or monthly billing statement.
Principal
The amount you borrowed and have to pay back. Your monthly payment includes a portion that goes toward the principal balance. As you pay down principal, you owe less and pay less interest each month.
Property Taxes
An ad valorem tax on the value of a property levied by the governing jurisdiction. In Escambia and Santa Rosa counties, property taxes are typically collected within your monthly mortgage payment and held in escrow until due.
Rate Lock
An agreement between a borrower and lender that guarantees a specific interest rate for a set period of time, typically 30–60 days. A rate lock protects you from rate increases while your loan is being processed.
Refinance
Trading in your old mortgage for a new one, often with different terms. Refinancing can allow you to lower your interest rate, change your loan term, switch from ARM to fixed-rate, or access your home's equity through a cash-out refinance.
Right of Rescission
A right under the Truth in Lending Act (TILA) allowing a borrower to cancel a home equity loan, line of credit, or refinance transaction with a new lender within 3 business days of closing. Does not apply to purchase transactions.
Second Mortgage
A loan secured by a property in addition to the primary mortgage, also referred to as a junior lien. Common forms include home equity loans and HELOCs. Second mortgages carry higher interest rates due to increased lender risk.
Title Insurance
Insurance that protects mortgage lenders and homebuyers against defects or problems with a title when there is a transfer of property ownership. Lender's title insurance is typically required; owner's title insurance is optional but recommended.
TRID
An acronym referring to the TILA-RESPA Integrated Disclosure rule. Requires lenders to provide a Loan Estimate within 3 business days of application and a Closing Disclosure at least 3 business days before closing.
Underwriting
The process by which a lender evaluates the risk of lending money to a borrower. The underwriter reviews your credit, income, assets, and the property to determine whether to approve the loan and under what terms.
USDA Loan
A mortgage offered through the U.S. Department of Agriculture for low-to-moderate income buyers in eligible rural and suburban areas. USDA loans offer $0 down payment and competitive rates. Many communities near Pensacola — including Pace, Milton, and Navarre — are USDA-eligible.
VA Loan
A mortgage offered through the U.S. Department of Veterans Affairs for active-duty military, veterans, and eligible surviving spouses. VA loans offer $0 down payment, no PMI, and competitive interest rates. Pensacola is home to NAS Pensacola, making VA loans especially relevant in our market.
Have a question about a term not listed here? Call us at (850) 725-6500 — we're happy to explain anything in plain English.