Mortgage Glossary

Plain-language definitions for common mortgage and real estate terms — from adjustable-rate mortgages to VA loan entitlement.

A

Adjustable-Rate Mortgage (ARM): A mortgage with an interest rate that changes periodically based on a benchmark index. ARMs typically start with a lower fixed rate for an initial period (such as 5, 7, or 10 years) and then adjust annually. The rate is subject to caps that limit how much it can increase per adjustment period and over the life of the loan.
Amortization: The process of paying off a loan through regular scheduled payments over time. Each payment is split between principal (the loan balance) and interest. In the early years of a mortgage, a larger portion of each payment goes toward interest, with more going toward principal as the loan matures.
Annual Percentage Rate (APR): The total annual cost of a mortgage expressed as a percentage. APR includes the interest rate plus other charges such as mortgage insurance, discount points, and certain closing costs. APR provides a more complete picture of borrowing costs than the interest rate alone.
Appraisal: A professional assessment of a property's market value conducted by a licensed appraiser. Lenders require appraisals to ensure the property is worth at least the amount being borrowed. VA appraisals also verify the property meets VA Minimum Property Requirements (MPRs).

B

Basis Point: A unit of measurement equal to one-hundredth of one percentage point (0.01%). For example, a rate change from 6.50% to 6.75% is an increase of 25 basis points. Basis points are commonly used in the mortgage industry to express small changes in interest rates.

C

Cash-Out Refinance: A refinance transaction in which you replace your existing mortgage with a new, larger loan and receive the difference in cash. The cash can be used for home improvements, debt consolidation, education, or other purposes. VA cash-out refinances allow borrowing up to 100% of the home's value.
Certificate of Eligibility (COE): A document issued by the Department of Veterans Affairs that certifies a veteran's eligibility for a VA-backed home loan. The COE shows the lender that the borrower meets the VA's service requirements. Lenders can often retrieve the COE electronically in minutes.
Closing Costs: Fees and expenses paid at the closing of a real estate transaction beyond the purchase price. Common closing costs include lender fees, appraisal fees, title insurance, attorney fees, recording fees, and prepaid items like property taxes and homeowner's insurance. They typically range from 2% to 5% of the loan amount.
Closing Disclosure: A five-page document that provides final details about the mortgage loan you have selected. It includes the loan terms, projected monthly payments, and how much you will pay in fees and closing costs. Lenders are required to provide the Closing Disclosure at least three business days before closing.
Conforming Loan: A mortgage that meets the guidelines set by Fannie Mae and Freddie Mac, including loan amount limits. For 2026, the standard conforming loan limit is $806,500 for most areas in the United States. Loans that exceed this limit are considered jumbo or non-conforming loans.
Conventional Loan: A mortgage that is not insured or guaranteed by a government agency such as the VA, FHA, or USDA. Conventional loans typically require higher credit scores and down payments but may offer lower overall costs for well-qualified borrowers. PMI is required if the down payment is less than 20%.

D

DD-214: The official discharge document issued to members of the U.S. military upon separation from active duty. The DD-214 provides information about the veteran's service dates, type of discharge, and other details. It is a key document for establishing VA loan eligibility.
Debt-to-Income Ratio (DTI): A financial measure that compares your total monthly debt payments to your gross monthly income, expressed as a percentage. Lenders use DTI to assess your ability to manage monthly payments. Most loan programs prefer a DTI below 43%, though VA loans may allow higher ratios with compensating factors.
Deed of Trust: A legal document that secures a mortgage loan by giving the lender a lien on the property. In Texas and many other states, a deed of trust is used instead of a traditional mortgage document. It involves three parties: the borrower, the lender, and a neutral third-party trustee.
Discount Points: Fees paid directly to the lender at closing in exchange for a reduced interest rate, also known as buying down the rate. One discount point equals 1% of the loan amount. Paying points can lower your monthly payment and total interest paid over the life of the loan.
Down Payment: The portion of the home's purchase price that the buyer pays upfront and is not financed through the mortgage. Down payment requirements vary by loan program: VA loans require 0%, FHA loans require at least 3.5%, and conventional loans typically require 3% to 20%. A larger down payment can result in better loan terms.

E

Earnest Money: A deposit made by the buyer to demonstrate serious intent to purchase a property, also called a good faith deposit. Earnest money is typically held in an escrow account and applied toward the down payment or closing costs at closing. The amount is usually 1% to 3% of the purchase price.
Entitlement: The amount the VA guarantees on a home loan for an eligible veteran. Basic entitlement is $36,000 and bonus entitlement provides additional coverage. Full entitlement means there is no loan limit, while reduced entitlement (when some has been used) may subject the borrower to county-based loan limits.
Equity: The difference between your home's current market value and the amount you owe on your mortgage. Equity builds over time as you make mortgage payments and as the property appreciates in value. Home equity can be accessed through a cash-out refinance or home equity loan.
Escrow: An account held by the mortgage servicer to collect and pay property taxes and homeowner's insurance on behalf of the borrower. A portion of each monthly mortgage payment is deposited into the escrow account. Escrow also refers to the period between signing a purchase agreement and closing.

F

FHA Loan: A mortgage insured by the Federal Housing Administration, designed for borrowers with lower credit scores and smaller down payments. FHA loans require a minimum 3.5% down payment with a credit score of 580 or higher. They require both upfront and annual mortgage insurance premiums.
Fixed-Rate Mortgage: A mortgage with an interest rate that remains constant throughout the entire term of the loan. The most common terms are 15 and 30 years. Fixed-rate mortgages provide predictable monthly payments, making budgeting easier for homeowners.
Funding Fee: A one-time fee charged by the VA on VA-guaranteed loans to help sustain the loan program. The fee ranges from 1.25% to 3.3% of the loan amount depending on service type, down payment, and whether it is a first or subsequent use. Veterans with service-connected disabilities are exempt from the funding fee.

G

Good Faith Estimate: A document that provides an estimate of the costs associated with a mortgage loan. While largely replaced by the Loan Estimate form under TRID regulations, the term is still commonly used. The Loan Estimate must be provided within three business days of receiving a loan application.

H

Home Inspection: A thorough examination of a property's condition conducted by a licensed home inspector. The inspection covers structural components, roofing, plumbing, electrical, HVAC, and other systems. Unlike a VA appraisal, a home inspection is optional but highly recommended for all buyers.
Homeowner's Insurance: Insurance that protects the homeowner against loss or damage to the property from events such as fire, storms, theft, and liability claims. Mortgage lenders require homeowner's insurance as a condition of the loan. Premiums are often paid through the escrow account as part of the monthly mortgage payment.

I

Interest Rate: The cost of borrowing money expressed as a percentage of the loan amount. The interest rate determines how much you pay in interest each month and over the life of the loan. Rates are influenced by factors including credit score, loan type, down payment, loan term, and market conditions.
IRRRL (Interest Rate Reduction Refinance Loan): A VA refinance program also known as the VA Streamline Refinance. It allows veterans with an existing VA loan to refinance to a lower interest rate with minimal documentation, often without an appraisal. The borrower must demonstrate a net tangible benefit from the refinance.

J

Jumbo Loan: A mortgage that exceeds the conforming loan limits set by the Federal Housing Finance Agency. In most areas, loans above $806,500 for 2026 are considered jumbo. Jumbo loans typically have stricter qualification requirements including higher credit scores, lower DTI ratios, and larger down payments.

L

Loan Estimate: A three-page document that provides important details about the mortgage you have applied for, including estimated interest rate, monthly payment, and total closing costs. Lenders must provide the Loan Estimate within three business days of receiving your application. It allows you to compare offers from different lenders.
Loan-to-Value Ratio (LTV): The ratio of the mortgage amount to the appraised value of the property, expressed as a percentage. For example, a $380,000 loan on a $400,000 home has an LTV of 95%. Lower LTV ratios generally result in better loan terms. VA loans allow up to 100% LTV.

M

Mortgage Insurance Premium (MIP): Insurance required on FHA loans that protects the lender in case the borrower defaults. FHA MIP has two components: an upfront premium of 1.75% of the loan amount and an annual premium of 0.55% to 1.05% of the loan balance paid monthly. MIP is required for most FHA loans for the life of the loan.

N

Net Tangible Benefit: A requirement for VA IRRRL refinances that the new loan must provide a measurable financial advantage to the borrower. This can include a lower interest rate, a lower monthly payment, a shorter loan term, or refinancing from an adjustable-rate to a fixed-rate mortgage.

O

Origination Fee: A fee charged by the lender for processing a new loan application. It covers the cost of underwriting, processing, and funding the loan. Origination fees are typically 0.5% to 1% of the loan amount. VA loans limit the origination fee to no more than 1% of the loan amount.

P

PITI: An acronym for Principal, Interest, Taxes, and Insurance, which are the four components of a typical monthly mortgage payment. Lenders use PITI to determine your total monthly housing expense when calculating debt-to-income ratios and affordability.
PMI (Private Mortgage Insurance): Insurance required by lenders on conventional loans when the borrower makes a down payment of less than 20%. PMI protects the lender if the borrower defaults on the loan. It can be removed once the borrower reaches 20% equity in the home. VA loans do not require PMI.
Pre-Approval: A conditional commitment from a lender specifying the loan amount a borrower qualifies for, based on verified income, assets, credit, and employment. A pre-approval letter demonstrates to sellers that you are a serious and qualified buyer. It is a stronger indicator than pre-qualification.
Pre-Qualification: An informal assessment of how much a borrower may be able to borrow based on self-reported financial information. Pre-qualification does not involve verification of documents and is less reliable than a pre-approval. It provides a general idea of your borrowing capacity.
Principal: The original amount of money borrowed in a mortgage loan, not including interest. As you make monthly payments, a portion goes toward reducing the principal balance. Over time, as the principal decreases, a larger share of each payment goes toward principal rather than interest.
Property Tax: A tax levied by local governments based on the assessed value of real property. Property taxes fund local services such as schools, roads, and emergency services. In Texas, there is no state income tax, so property tax rates tend to be higher than the national average.

R

Rate Lock: An agreement between the borrower and lender that guarantees a specific interest rate for a set period, typically 30 to 60 days. A rate lock protects the borrower from rate increases during the loan processing period. If rates drop, some lenders offer a float-down option.
Refinance: The process of replacing an existing mortgage with a new one, typically to obtain a lower interest rate, change the loan term, switch from an adjustable to a fixed rate, or access home equity. Common types include rate-and-term refinance, cash-out refinance, VA IRRRL, and FHA Streamline.

T

Title Insurance: Insurance that protects the lender and/or homeowner against financial loss from defects in the title to a property. Title defects can include liens, encumbrances, or ownership disputes. Lender's title insurance is required; owner's title insurance is optional but recommended.

U

Underwriting: The process by which a lender evaluates the risk of making a mortgage loan to a borrower. The underwriter reviews the borrower's creditworthiness, income, assets, employment, and the property's value and condition. The underwriter ultimately decides whether to approve, deny, or conditionally approve the loan.
USDA Loan: A mortgage program guaranteed by the U.S. Department of Agriculture designed for low-to-moderate income borrowers in eligible rural and suburban areas. USDA loans offer 100% financing with no down payment. They require a guarantee fee similar to the VA funding fee.

V

VA Loan: A mortgage loan guaranteed by the U.S. Department of Veterans Affairs available to eligible veterans, active-duty service members, and surviving spouses. VA loans offer benefits including no down payment, no PMI, competitive interest rates, and limited closing costs.
VA Minimum Property Requirements (MPRs): Standards set by the VA that a property must meet to be eligible for VA financing. MPRs cover safety, structural soundness, and sanitary conditions. The VA appraiser checks these requirements during the appraisal process. Common issues include peeling paint, faulty roofing, and inadequate heating.