Mortgage Terminology

Mortgage Glossary: Essential Terms for Residential, Commercial, and Business Loans

Conventional Loans

Definition: Conventional loans are mortgages that are not backed by any government agency. These loans often conform to Fannie Mae and Freddie Mac standards, making them one of the most common loan types for residential homebuyers.
Formula: Maximum loan amount = 45% of the borrower’s gross monthly income. First time home buyers can have a DTI ratio of up to 50% of the monthly income.
Key Terms: Conventional mortgage, non-government loan, private lender.
Current Minimum Down Payment: 5% of Purchase Price with fico of 680+

FHA Loans

Definition: Federal Housing Administration (FHA) loans are government-backed mortgages that require lower down payments, making them ideal for first-time homebuyers or those with less-than-perfect credit.
Down Payment: 3.5% of the purchase price for borrowers with a credit score of 560+.
Key Terms: FHA loan, low down payment mortgage, government-backed mortgage.

VA Loans

Definition: VA loans are mortgages for veterans, active-duty military personnel, and their families, backed by the U.S. Department of Veterans Affairs. These loans often have no down payment requirements.
Key Terms: VA mortgage, military loan, no down payment loan.

Jumbo Loans

Definition: Jumbo loans are non-conforming loans that exceed the conventional loan limits set by Fannie Mae and Freddie Mac. These loans are often used to finance luxury properties.
MAX Debt to income ratio of 45%( It varies with lenders)
Key Terms: Jumbo mortgage, luxury home loan, non-conforming loan.

DSCR Loans (Debt Service Coverage Ratio)

- Definition: DSCR loans are typically used for investment properties and are based on the cash flow generated by the property rather than the borrower’s personal income.
- Formula: DSCR = Net Operating Income / Total Debt Service
- Key Terms: DSCR loan, investment property loan, cash flow mortgage.
- AIRBNB

1099 Loans

- Definition: 1099 loans are designed for self-employed borrowers or independent contractors who receive income through 1099 forms. These loans often use alternative documentation such as bank statements.
- Key Terms: 1099 mortgage, self-employed loan, bank statement loan.
- Lender’s calculation of income varies.

Bank Statement Loans

- Definition: Bank statement loans allow self-employed borrowers to qualify for a mortgage based on their bank statements instead of traditional tax returns.
- Key Terms: Bank statement mortgage, self-employed mortgage, alternative documentation loan.
- Lender’s Calculation of Income varies.

ITIN Loans

- Definition: ITIN loans are for borrowers who do not have a Social Security number but have an Individual Taxpayer Identification Number (ITIN). These loans are popular among immigrants and foreign nationals.
- Key Terms: ITIN mortgage, immigrant loan, no SSN loan.
- Lender’s Down payment requirement varies.

Foreign National Loans

- Definition: Foreign national loans allow non-U.S. citizens or residents to purchase property in the U.S., often requiring a larger down payment and alternative income verification.
- Key Terms: Foreign national mortgage, international home loan, non-resident mortgage.
- In most cases, 35% down payment is required.

SBA 7(a) Loans

- Definition: SBA 7(a) loans are government-backed loans for small businesses, used for working capital, equipment, or real estate purchases.
- Key Terms: SBA 7(a) loan, small business loan, government business loan.
- Down Payment can be as low as 5%.

SBA 504 Loans

- Definition: SBA 504 loans are used for purchasing commercial real estate or large equipment, with part of the loan backed by the Small Business Administration.
- Key Terms: SBA 504 mortgage, commercial real estate loan, SBA-backed loan.
- Down Payment can be as low as 5%.

Commercial Real Estate Loans

Definition: Commercial real estate loans are used to purchase, build, or renovate properties such as office buildings, retail, gas stations, hotels, warehouses, and apartments.
Key Terms: Commercial property loan, business mortgage, real estate investment loan.
DSCR plays an important role in how much down payment is required.

Business Loans

- Definition: Business loans provide funding for small and large businesses, covering operational costs, expansion, or equipment purchases.
- Key Terms: Business financing, small business loan, equipment loan.
- Cash flow plays an important role.

Equipment Loans

- Definition: Equipment loans are used to purchase necessary equipment for businesses, and the equipment itself is often used as collateral.
- Key Terms: Equipment financing, business asset loan, equipment mortgage.
- Cash flow plays an important role.

Islamic Loans

Definition: Islamic loans are Sharia-compliant financing options that do not involve charging interest (riba). Instead, profits are shared, or the bank buys and resells the property at a profit.
Key Terms: Sharia-compliant loan, Islamic mortgage, riba-free loan.

Creative Financing

Definition: Creative financing includes alternative loan structures such as seller financing, lease options, or hard money loans for those who may not qualify for traditional mortgages.
Key Terms: Creative mortgage, seller financing, hard money loan.

Impound Account (Escrow Account)

- Definition: An impound account holds funds for property taxes and insurance, which are paid by the lender on the borrower’s behalf.
- Key Terms: Escrow account, tax impound, insurance impound.
- Certain loans such as FHA/VA are impounded

Non-Impound Account

- Definition: A non-impound account means the borrower is responsible for paying their property taxes and insurance directly.
- Key Terms: Non-escrow mortgage, non-impound loan, self-managed escrow.
- Some Lenders might give you a hit on the rate to make it a non-impounded account.

Principal

Definition: The principal is the amount of money borrowed for a mortgage, excluding interest.
Key Terms: Loan principal, mortgage balance, home loan amount.

Interest

Definition: Interest is the cost of borrowing money, typically calculated as a percentage of the loan balance.
Key Terms: Mortgage interest, interest rate, home loan cost.

Amortization

Definition: Amortization is the process of repaying a loan through scheduled payments over time, with both interest and principal included in each payment.
Key Terms: Loan amortization, mortgage schedule, repayment terms.

Loan Origination Fee

Definition: A loan origination fee is a charge by the lender for processing a new mortgage, often expressed as a percentage of the loan amount.
Key Terms: Mortgage origination fee, loan processing fee, closing costs.

Private Mortgage Insurance (PMI)

Definition: PMI is required on conventional loans when the borrower puts down less than 20%, protecting the lender if the borrower defaults.
Key Terms: PMI, mortgage insurance, low down payment loan.

Prepayment Penalty

Definition: A prepayment penalty is a fee charged when a borrower pays off their mortgage early, before the loan term ends.
Key Terms: Mortgage prepayment penalty, early payoff fee, loan payoff penalty.

Closing Costs

Definition: Closing costs include all fees and expenses required to close a real estate transaction, such as title insurance, attorney fees, and appraisal costs.
Key Terms: Home closing costs, loan fees, real estate transaction costs.

Balloon Payment

Definition: A balloon payment is a large, one-time payment due at the end of certain types of mortgages, such as balloon loans, where initial payments are smaller.
Key Terms: Balloon mortgage, lump sum payment, final loan payment.

Fixed-Rate Mortgage

Definition: A fixed-rate mortgage keeps the interest rate the same for the entire loan term, resulting in consistent monthly payments.
Key Terms: Fixed-rate loan, stable mortgage, consistent payments.

Adjustable-Rate Mortgage (ARM)

Definition: An ARM has an interest rate that can change periodically, which may result in fluctuating monthly payments.
Key Terms: Adjustable-rate mortgage, variable rate loan, ARM.

Points (Discount Points)

Definition: Points are a one-time fee paid upfront to reduce the interest rate on a mortgage. Each point equals 1% of the loan amount.
Key Terms: Mortgage points, discount points, interest rate buy-down.

Escrow

Definition: An escrow is an arrangement where a third party holds funds until conditions of the transaction are met, often used for taxes and insurance payments in mortgages.
Key Terms: Escrow account, third-party holding, tax escrow.

Title Insurance

Definition: Title insurance protects the lender and the borrower against potential claims or disputes over property ownership.
Key Terms: Title insurance policy, property title protection, ownership insurance.

Appraisal

- Definition: An appraisal is an independent evaluation of a property’s market value, typically required by lenders before approving a mortgage.
- Key Terms: Home appraisal, property valuation, market value assessment.
- Residential appraisers use Sales Approach by comparing the recent sales to come up with a value for the property.
- Commercial appraisers use the income approach to come up with a value for the property.

Underwriting

Definition: Underwriting is the process where the lender reviews the borrower’s financial information to assess the risk of issuing the loan.
Key Terms: Loan underwriting, mortgage approval process, financial review.

Debt-to-Income (DTI) Ratio

Definition: The DTI ratio measures a borrower’s ability to manage monthly payments by comparing debt obligations to gross income.
Formula: DTI = (Monthly Debt Payments / Gross Monthly Income) * 100
Key Terms: DTI ratio, debt-to-income, loan qualification.

Loan Estimate

Definition: A loan estimate is a document that outlines the key terms, fees, and estimated closing costs associated with a loan.
Key Terms: Loan estimate form, mortgage terms, closing cost estimate.

Mortgage Insurance Premium (MIP)

Definition: MIP is a fee paid on FHA loans, designed to protect the lender in case of default.
Key Terms:

Contact Us Today!

Ready to take the next step? Contact us today at 510-786-8739 to discuss your mortgage needs. Whether you’re buying your first home, refinancing, or exploring your options, we’re here to help. Let’s make your homeownership dreams a reality, together.

Apply Now

We are an independent mortgage brokerage licensed through DRE, proudly serving clients since 2007.

DRE#01480904 and NMLS# 300923