Mortgage Glossary

Amortization: The schedule of payments that pays off your loan over time. Early payments go mostly toward interest; later payments go mostly toward the balance itself.

APR (Annual Percentage Rate): The yearly cost of your loan as a percentage, including the interest rate plus most lender fees. APR is usually higher than the interest rate alone, which is why it’s the better number for comparing loan offers.

Appraisal : An independent estimate of a home’s market value, done by a licensed appraiser. Lenders order one to confirm the home is worth what you’re paying for it.

Closing Costs : The fees you pay to finalize your loan, typically 2% to 5% of the loan amount. These can include the appraisal, title insurance, origination fee, and prepaid property tax or insurance.

Closing Disclosure : A form you receive at least three business days before closing that lists your final loan terms, monthly payment, and closing costs. Compare it against your Loan Estimate to make sure nothing changed.

Debt-to-Income Ratio (DTI): Your total monthly debt payments divided by your gross monthly income. Most programs want to see a DTI at or below roughly 45-50%, though the exact limit depends on the program and other compensating factors (CFPB).

Down Payment : The part of the home’s price you pay upfront in cash. Down payments can range from 3% (Home Advantage 3) to 20% or more, depending on the program.

Earnest Money Deposit : A good-faith deposit you put down when your offer is accepted, showing the seller you’re serious. It’s credited toward your down payment or closing costs at closing.

Equity : The difference between your home’s current value and what you still owe on your mortgage. Equity grows as you pay down your loan and as your home’s value rises.

Escrow : A neutral third party holds funds or documents until closing conditions are met. After closing, “escrow” also refers to the account your servicer uses to collect and pay your property tax and insurance for you.

Homeowners Insurance : A policy that protects your home against damage and covers liability. Lenders require it for as long as you have a mortgage.

Interest Rate vs. APR {#interest-rate-vs-apr} The interest rate is the cost of borrowing the loan amount itself. APR adds in most lender fees, so it reflects the fuller cost of the loan. Two loans with the same rate can carry different APRs.

Loan Estimate : A standardized form you receive within three business days of applying, showing your estimated rate, payment, and closing costs, so you can compare offers from different lenders side by side.

Loan-to-Value Ratio (LTV) : Your loan amount divided by the home’s appraised value. A lower LTV, from a bigger down payment or more equity, often means a lower rate and no mortgage insurance requirement.

Mortgage Points (Discount Points): An upfront fee paid to lower your interest rate. One point typically costs 1% of the loan amount and lowers your rate by a small, lender-specific amount.

Origination Fee {#origination-fee} A fee a lender charges to process your loan application. It’s disclosed on your Loan Estimate and Closing Disclosure.

Private Mortgage Insurance (PMI) : Insurance that protects the lender, not you, if you default. It’s typically required on conventional loans when your down payment is below 20%, and it can usually be removed once you reach 20% equity.

Property Tax : An annual tax based on your home’s assessed value, billed by the county. In California, Proposition 13 caps how much your assessed value can increase each year, which keeps long-term property tax growth predictable.

Rate Lock: A lender’s guarantee to hold a specific interest rate for a set period while your loan is processed, protecting you if rates rise before closing.

Title Insurance: A one-time policy that protects you and your lender against past ownership problems with the property, like liens or claims you didn’t know about.

Underwriting : The lender’s process of verifying your income, assets, credit, and the property details to decide whether to approve your loan.

Pre-Qualification : An early, informal estimate of what you might be able to borrow, based on numbers you self-report. It’s a starting point, not a firm commitment.

Pre-Approval: A more thorough review where a lender verifies your income, assets, and credit to give you a firm idea of what you can borrow. Pre-approval carries more weight with sellers than pre-qualification.

Conditional Approval : A step beyond pre-approval where underwriting has reviewed your file and approved it subject to a short list of remaining conditions, like a final pay stub or an updated bank statement.

Clear to Close : The final underwriting sign-off confirming every condition has been met and your loan is ready to fund. This comes right before your closing date is set.

Contingent Offer : A purchase offer that depends on something else happening first, most often the sale of your current home. Contingent offers are common but can be less competitive in a fast-moving market. (See: Buy Before You Sell)

Conforming Loan Limit : The maximum loan amount Fannie Mae and Freddie Mac will back. For 2026, the baseline limit is $832,750, but high-cost areas like Contra Costa County have a higher ceiling of $1,249,125 for a one-unit home (FHFA). Loans above the local limit are jumbo loans.

Credit Score (FICO Score): A three-digit number, generally 300 to 850, that reflects your credit history. Lenders use it, along with income and assets, to help set your rate and terms.

Reserves (Cash Reserves): Savings left over after your down payment and closing costs, shown in months of mortgage payments. Some programs, especially for investment properties or asset-based loans, require a set number of months in reserve.

My Mortgage Ally’s specialty. These programs help borrowers whose income doesn’t fit a standard W-2 file.

Non-QM Loan (Non-Qualified Mortgage) : A loan that doesn’t meet the standard “Qualified Mortgage” documentation rules, built for borrowers with income that doesn’t fit a traditional W-2 file. Self-employed borrowers, investors, and retirees living off assets often use Non-QM programs. 

Bank Statement Loan :A Non-QM program that qualifies you using 12-24 months of personal or business bank deposits instead of tax returns. Common for self-employed borrowers whose tax write-offs lower their reported income. 

Profit & Loss (P&L) Only Loan : A Non-QM program that qualifies business owners using a profit and loss statement, often prepared by a CPA, instead of full tax returns. 

DSCR Loan (Debt Service Coverage Ratio) :  An investor loan qualified using the property’s rental income instead of your personal income. Lenders compare the rent the property can generate to its monthly payment. 

Asset Utilization Loan : A Non-QM program that qualifies you using your savings, investments, and retirement accounts instead of monthly income. Useful for retirees or high-net-worth borrowers with limited reported income. 

No Income, No Employment Loan : A specialized Non-QM program for borrowers with significant verifiable assets who don’t need to document income or employment. Down payment and reserve requirements are typically higher than standard programs. 

W-2 Only Loan : A streamlined program that qualifies you using only your W-2 income, skipping the extra documentation self-employed programs require. 

1099 Income Borrower : A borrower paid as an independent contractor rather than a W-2 employee. Depending on your history and documentation, you may qualify through standard or Non-QM programs.

Self-Employed Borrower : Generally, anyone who owns 25% or more of a business. Most standard programs ask for a two-year self-employment history, though Non-QM programs like bank statement and P&L-only loans offer more flexibility.

Gift Funds : Money given to you by a relative or eligible donor to help with your down payment or closing costs, usually requiring a signed gift letter confirming it doesn’t need to be repaid.

Seller Concessions : Money the seller agrees to contribute toward your closing costs, negotiated as part of your purchase offer. Loan programs cap how much a seller can contribute.