40 Terms Defined

Mortgage Glossary: FHA & Conventional Loan Terms

Key terms for FHA and conventional loans defined with precision, citing HUD 4000.1, Fannie Mae Selling Guide, and relevant federal statutes. Use the alphabet nav to jump to any letter.

A B C D E F G H I J L M O P R S T U V W

A

AMI

Area Median Income. The median household income for a geographic area, calculated annually by HUD. HomeReady and Home Possible income limits are set at 80% of AMI. USDA eligibility caps at 115% AMI. Varies significantly by metro: 80% AMI in San Francisco can exceed 80% AMI in rural Mississippi by 3x.

See also: HomeReady, Home Possible, USDA

Annual MIP

Annual Mortgage Insurance Premium. The ongoing monthly FHA insurance charge, expressed as an annual percentage of the outstanding loan balance. In 2026, the standard rate is 0.55% for 30-year loans with down payments below 10%. Divided by 12 and added to the monthly payment. Unlike PMI, annual MIP does not automatically cancel for most FHA loans. Source: HUD ML 2024-04.

Appraisal

A licensed appraiser's opinion of a property's market value, required by lenders before funding any mortgage. FHA appraisals must be performed by an appraiser on HUD's FHA Roster and include a property condition review (safety hazards, peeling paint, roof condition). Conventional appraisals focus primarily on value. FHA appraisals are typically $50-150 more expensive. The appraisal is ordered by the lender, not the borrower.

See also: FHA Appraiser, Appraised Value, LTV

AUS

Automated Underwriting System. Software that evaluates mortgage applications against investor guidelines and returns an eligibility finding. FHA uses TOTAL Mortgage Scorecard (also called TOTAL/SCORECARD). Conventional uses Fannie Mae's Desktop Underwriter (DU) or Freddie Mac's Loan Product Advisor (LP). An AUS 'Approve/Eligible' finding speeds loan processing; a 'Refer' requires manual underwriting.

B

Back-End DTI

The ratio of all monthly debt obligations to gross monthly income. Includes proposed PITI (principal, interest, taxes, insurance, HOA) plus all other recurring debts (car loans, minimum credit card payments, student loans, child support). FHA standard limit: 43%. FHA maximum with compensating factors: 56.9%. Conventional standard: 45%. Conventional maximum: 50%.

Basis Points (bps)

One one-hundredth of a percentage point. 25 basis points = 0.25%. Used to describe interest rate and fee differences with precision. 'The FHA rate is 18 basis points above conventional' means the FHA rate is 0.18% higher. Relevant when comparing rate quotes where differences are fractions of a percent.

C

Chenoa Fund

A nationwide down payment assistance programme administered by CBC Mortgage Agency (a federally chartered tribal housing finance agency). Provides second mortgage assistance covering FHA's 3.5% minimum down payment. Two options: repayable 0% second (no income limit) and forgivable second (forgiven after 36 months of on-time payments; income limit 135% AMI). Available in all 50 states. Requires 620+ FICO and FHA first mortgage.

Compensating Factors

Documented strengths in a loan application that allow lenders to approve loans with characteristics exceeding standard guidelines. For FHA, HUD 4000.1 II.A.5.d defines specific compensating factors: verified reserves (3-12 months PITI), excellent credit (680+), minimal payment shock, VA residual income standard, and significant down payment. Two compensating factors are typically required to push DTI above standard limits.

Conforming Loan

A mortgage that meets Fannie Mae or Freddie Mac purchase guidelines, including loan amount limits set annually by FHFA. 2026 baseline limit: $806,500 for a 1-unit property. High-cost areas: up to $1,209,750. Loans above these limits are 'jumbo' and do not qualify for Fannie/Freddie purchase. Conforming loans typically carry lower rates than jumbo loans because of the secondary market liquidity.

D

DPA

Down Payment Assistance. Funds provided by government agencies, non-profits, or employers to cover part or all of a home purchase down payment and/or closing costs. Forms include grants (no repayment), forgivable loans (forgiven over time), deferred 0% loans (repaid at sale/refi), and soft seconds. FHA allows DPA from HUD-approved sources. Conventional DPA compatibility varies by programme.

DTI

Debt-to-Income ratio. The percentage of gross monthly income required to cover monthly debt payments. Two measurements: front-end (housing only) and back-end (all debts). DTI is one of the most critical approval factors -- alongside credit score and LTV -- in mortgage underwriting. Calculated as: monthly obligations / gross monthly income x 100.

DU

Desktop Underwriter. Fannie Mae's Automated Underwriting System (AUS) for evaluating conventional mortgage applications. Returns findings of Approve/Eligible, Refer/Eligible, or Ineligible. An Approve/Eligible finding satisfies Fannie Mae's underwriting requirements and dramatically reduces documentation requirements. Most conventional lenders use DU as the primary underwriting tool.

E

Earnest Money

A deposit (typically 1-3% of purchase price) paid by the buyer when entering a purchase contract, demonstrating serious intent. Held in escrow by a title company or attorney. Applied toward down payment or closing costs at closing. Earnest money is at risk of forfeiture if the buyer backs out without a contract contingency. Does not count as a qualifying asset for reserve requirements.

See also: Escrow, Purchase Contract, Reserves

Escrow

Two distinct meanings in mortgage: (1) The closing process, where a neutral third party holds funds and documents until all conditions are met. (2) The ongoing impound account where the lender collects monthly funds to pay property taxes and homeowners insurance on the borrower's behalf. FHA requires escrow impounds. Many conventional loans above 80% LTV also require them. Visit whatisescrow.com for a complete guide.

F

FHFA

Federal Housing Finance Agency. The federal regulator that oversees Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. FHFA publishes annual conforming loan limit adjustments each November based on the House Price Index. The 2026 baseline limit of $806,500 was set by FHFA based on 2025 HPI data.

FHA

Federal Housing Administration. A federal agency within HUD that insures mortgage loans made by approved lenders. FHA does not lend money directly -- it insures lenders against default, making lenders willing to offer lower down payment and credit requirements. Funded by MIP premiums paid by borrowers. The Single Family Housing Policy Handbook (HUD 4000.1) governs FHA lending.

Front-End DTI

The ratio of proposed housing expense (PITI: principal, interest, taxes, insurance, HOA dues, MIP/PMI) to gross monthly income. Also called the housing ratio. FHA standard limit: 31%. With compensating factors: 40%. Conventional: no hard front-end limit set by Fannie, though lenders may impose overlays around 45%. Lower than back-end DTI because it excludes other debts.

G

Gift Funds

Money provided to a buyer by a donor (family member, employer, charitable organisation, or government agency) to help with down payment or closing costs. FHA allows 100% of the minimum down payment to come from gift funds. Conventional requires own funds for certain property types and loan scenarios. Gift funds require a signed gift letter confirming no repayment. Source: HUD 4000.1 II.A.4.c.

See also: Down Payment, DPA, FHA Requirements

H

HFA

Housing Finance Agency. A state or local government agency that issues mortgage revenue bonds to fund below-market-rate mortgages and down payment assistance programmes. Every state has at least one HFA (CalHFA, TSAHC, OHFA, etc.). HFA first mortgages often carry slightly above-market rates in exchange for DPA. HFA programmes typically require using an HFA-approved participating lender.

See also: DPA, State Programs, Chenoa Fund

HomeReady

Fannie Mae's affordable conventional mortgage programme for low-to-moderate income borrowers. Features: 3% minimum down payment, reduced PMI rates, 97% LTV available, income limit at 80% AMI (some tracts have no limit). Requires completion of a homebuyer education course. Non-borrower household income (roommate, parent) can be used as a compensating factor. Allows boarder income (30% of qualifying income).

Home Possible

Freddie Mac's counterpart to HomeReady. 3% minimum down, 80% AMI income limit, reduced PMI. Key differences: allows non-occupant co-borrowers (for 95.01-97% LTV), accepts sweat equity as down payment, allows manufactured homes. Freddie LP calculates student loan obligations at 0.5% of balance vs Fannie's 1%, which can result in materially lower DTI for heavily-indebted borrowers.

HUD

U.S. Department of Housing and Urban Development. The federal department that administers FHA, sets HUD Community Development Block Grant programmes, enforces fair housing laws, and operates housing counselling grants. HUD's Single Family Housing Policy Handbook (4000.1) is the authoritative source for all FHA single-family mortgage requirements. Updated continuously at hud.gov.

See also: FHA, HUD 4000.1, Housing Counselling

I

Interest Rate vs APR

The interest rate is the annual percentage charged on the loan principal. APR (Annual Percentage Rate) is the broader cost measure including interest plus fees (origination, mortgage insurance, points). For FHA loans, APR is almost always significantly higher than the interest rate because the 1.75% UFMIP is amortised into the APR calculation. Comparing APRs (not just rates) is the correct way to compare FHA and conventional loan costs.

See also: UFMIP, Origination Fee, Points

J

Jumbo Loan

A mortgage that exceeds the conforming loan limits set by FHFA. In 2026: above $806,500 in most areas, above $1,209,750 in high-cost markets. Jumbo loans are not purchased by Fannie or Freddie and cannot use FHA insurance. They carry stricter requirements: typically 700+ FICO, 10-20% down, 43-45% DTI, and larger reserves. Rates are usually 0.125-0.375% higher than conforming.

See also: Conforming Loan, FHFA, Loan Limits

L

LTV

Loan-to-Value ratio. The mortgage balance divided by the property's appraised value, expressed as a percentage. LTV = Loan / Value x 100. Lower LTV = more equity = lower risk. PMI is required on conventional loans above 80% LTV. FHA requires MIP regardless of LTV. At 78% LTV conventional PMI auto-cancels (HPA). FHA MIP cancellation at 90% LTV only possible if 10%+ was the original down payment.

M

Manual Underwriting

Loan approval by a human underwriter reviewing the complete file, as opposed to automated AUS approval. Required when AUS returns a Refer/Caution finding. FHA manual underwriting follows HUD 4000.1 Chapter II.A.5, with specific compensating factor requirements. Conventional manual underwriting is rarely used by major lenders. Manual underwriting takes longer (2-3 weeks vs 3-5 days AUS) but can approve loans that AUS declines.

See also: AUS, Compensating Factors, DTI

MIP

Mortgage Insurance Premium. The insurance cost on FHA loans, paid to HUD. Two components: Upfront MIP (UFMIP) of 1.75% of base loan, paid at closing or financed; and Annual MIP (0.55% for most 30-year loans in 2026), charged monthly. Unlike PMI, FHA MIP does not disappear for loans with less than 10% down payment -- it lasts the life of the loan. This is the defining financial disadvantage of FHA vs conventional.

See also: UFMIP, Annual MIP, PMI, MIP-for-Life

MIP-for-Life

The policy, effective June 3, 2013 (HUD ML 2013-04), requiring FHA annual MIP to continue for the full loan term for borrowers who put less than 10% down. Before this policy change, MIP cancelled at 78% LTV like PMI. The change was driven by FHA's depleted insurance fund following the 2008 crisis. This single policy is the reason many financial advisors recommend conventional over FHA for borrowers who qualify.

O

Origination Fee

A lender charge for processing and funding a mortgage. On FHA loans, HUD caps origination at 1% of the loan amount. Conventional origination is unregulated (though CFPB's ability-to-repay rules limit total points and fees). Origination can be paid as: cash at closing, wrapped into the rate (higher rate in exchange for lender credits), or via discount points (paying upfront to buy down the rate).

P

PITI

Principal, Interest, Taxes, Insurance. The four components of a full monthly mortgage payment: loan principal repayment, interest charge, property taxes (collected monthly to escrow), and homeowners insurance (collected monthly to escrow). Lenders use PITI for DTI calculations. For FHA borrowers, PITIM = PITI plus monthly MIP. For conventional with PMI, PITIPM = PITI plus monthly PMI.

PMI

Private Mortgage Insurance. Insurance required on conventional loans when LTV exceeds 80%. Paid by the borrower but protects the lender. PMI rates depend on credit score, LTV, and loan type: typically 0.2-1.5% annually. Automatically cancelled at 78% LTV per the Homeowners Protection Act (12 USC 4902). Can be requested at 80% LTV with a good payment history. Unlike FHA MIP, PMI has a defined endpoint.

See also: MIP, LTV, HPA, PMI Cancellation

Points

Prepaid interest paid at closing to reduce the mortgage interest rate. One point = 1% of the loan amount. Paying 1 point on a $300,000 loan costs $3,000 and typically buys down the rate by 0.25-0.375%. Makes sense for borrowers who plan to stay in the home long enough for the monthly savings to recover the upfront cost. Do not confuse with origination points (a lender fee).

See also: Origination Fee, Interest Rate, APR

R

Reserves

Liquid assets remaining after down payment and closing costs. Measured in months of PITI. Standard requirements: FHA typically 0 months for 1-2 unit primary residences, 3 months for 3-4 units. Conventional: 0-6 months depending on DU finding. As a compensating factor for high DTI: FHA requires 3 months for DTI 43-50%, 12 months for DTI 50-56.9%. Stocks, retirement accounts (60-70% of vested value), and savings all count.

See also: Compensating Factors, PITI, DTI

S

Seasoning

The minimum time a loan or account must exist before it satisfies a guideline. Examples: FHA Streamline requires 6-month loan seasoning before refi. Gift funds in a bank account for less than 60 days require a gift letter; 60+ days of seasoning eliminates the sourcing requirement. Bankruptcy discharged within 2 years typically requires FHA wait 2 years; Fannie requires 4 years.

T

TOTAL/SCORECARD

Technology Open to Approved Lenders Mortgage Scorecard. HUD's Automated Underwriting System for FHA loans. Lenders submit loan data through TOTAL integrated into their LOS (Loan Origination Software). Returns Accept or Refer finding. An Accept finding allows the lender to close without manual underwriting, provided no AUS risk flags exist. A Refer requires manual underwriting by a DE (Direct Endorsement) underwriter.

U

UFMIP

Upfront Mortgage Insurance Premium. A one-time FHA insurance charge equal to 1.75% of the base loan amount. Charged on every FHA loan regardless of FICO, down payment, or loan term. Can be financed into the loan (most borrowers choose this), raising the loan balance above the purchase price. Not refundable after 3 years if the borrower refinances or sells. Source: HUD ML 2024-04.

See also: MIP, Annual MIP, FHA Closing Costs

Underwriting

The process of evaluating a mortgage loan application to determine whether to approve, deny, or conditionally approve. Reviews income, credit history, assets, property value, and compliance with investor guidelines. Underwriters are responsible for FHA compliance under the Direct Endorsement (DE) programme -- lenders approved for DE can underwrite and close FHA loans without prior HUD review.

V

VA Loan

A mortgage guaranteed by the U.S. Department of Veterans Affairs, available to eligible veterans, active duty servicemembers, National Guard (6 years), and surviving spouses. No down payment required with full entitlement. No PMI equivalent. Funding fee 1.25-3.3% (waived for 10%+ service-connected disability). Minimum FICO: VA sets none; lenders typically require 580-620. If eligible, VA is almost always the best loan type available.

See also: FHA, Conventional, Down Payment

W

Waiting Period

The mandatory time a borrower must wait after a derogatory credit event before qualifying for a new mortgage. FHA (HUD 4000.1): Chapter 7 bankruptcy = 2 years from discharge; Chapter 13 = 1 year with court permission. Foreclosure = 3 years. Short sale = 3 years. Conventional (Fannie): Chapter 7 = 4 years; Chapter 13 = 2 years. Foreclosure = 7 years (3 with extenuating circumstances). Short sale = 4 years.