Real estate & financing glossary

The share of your gross monthly income that goes to debt payments, including the proposed mortgage. Conventional loans generally cap DTI around 45% (up to 50% with strong compensating factors through automated underwriting); FHA often allows more.

Example: $6,000 monthly income with a $2,850 PITIA, $550 car payment, and $300 student loan is a 61.7% DTI. Adding $1,125 of allowable rental income from a duplex's second unit drops it to 51.9%.

The loan amount divided by the lower of the appraised value or purchase price. Lower LTV means more equity and less lender risk; it drives PMI, pricing, and maximum loan size.

Example: A $300,000 loan on a $400,000 duplex is 75% LTV.

How many times the property's rent covers its mortgage payment. Residential DSCR lenders typically use gross rent ÷ PITIA; commercial lenders use NOI ÷ annual debt service. A ratio of 1.25 or higher is the prime threshold for investor loans.

Example: $3,900 of monthly rent against a $2,225 PITIA is a 1.75 DSCR.

The full monthly housing payment lenders underwrite: loan principal and interest, property taxes, homeowners insurance, and HOA dues, plus mortgage insurance when it applies. PITI is the same figure without association dues.

Example: $2,172 P&I + $157 MIP + $420 taxes + $150 insurance = $2,899 PITIA.

Insurance required on conventional loans with less than 20% down. Priced by credit score and LTV (roughly 0.3% to 1.0% of the loan per year), and cancellable: you can request removal at 80% LTV and it terminates automatically at 78% on the original amortization schedule.

Example: A $285,000 loan at 0.55% costs about $131 a month until the balance reaches 80% of the original value.

FHA's mortgage insurance. It has an upfront premium of 1.75% of the base loan, financed into the balance, plus an annual premium (0.55% per year for most borrowers with less than 10% down) paid monthly. With under 10% down, annual MIP lasts the life of the loan; with 10% or more, it ends after 11 years.

Example: On a $337,750 base loan, UFMIP adds $5,911 and annual MIP runs about $157 a month.

The one-time 1.75% FHA premium added to the loan balance at closing. Because it is financed, you pay interest on it for the life of the loan.

A HUD agency that insures loans for buyers with moderate credit and limited savings. FHA 203(b) loans allow 3.5% down with a 580+ credit score on 1-4 unit owner-occupied properties, subject to the self-sufficiency test on 3-4 units.

A mortgage that meets Fannie Mae and Freddie Mac standards, including the FHFA loan limit, which rises with unit count and in high-cost counties. For 2026 the baseline one-unit limit is $832,750; two-, three-, and four-unit limits are higher. Loans above the limit are jumbo.

Example: A fourplex loan under the four-unit conforming limit qualifies for agency pricing; above it, jumbo underwriting applies.

HUD's requirement on FHA-financed 3-4 unit properties: 75% of the appraiser's estimated gross market rent for all units must equal or exceed the full monthly PITIA. It does not apply to duplexes.

Example: $4,050 of appraised rent × 0.75 = $3,037.50 must cover a $3,298 PITIA; this triplex fails until the price or rate comes down.

A loan a bank or credit union keeps on its own balance sheet instead of selling to Fannie Mae or Freddie Mac. Because the lender owns the risk, it sets its own rules: flexible documentation, negotiable terms, and hybrid underwriting that looks at both you and the property.

The seller acts as the lender: you pay principal and interest to the seller under a promissory note secured by a mortgage or deed of trust. Terms are negotiable, closings are fast, and most notes balloon in 3-7 years.

A lump-sum payoff of the remaining balance at a loan's maturity, common on seller carries and commercial-style loans amortized over 25-30 years but due in 5-10. Your exit (refinance or sale) must exist before you sign.

Example: A $252,000 note amortized over 30 years at 7% still owes about $237,000 when it balloons in year five.

Standard mortgage language allowing the lender to demand full repayment if the property is transferred. Wraparound and 'subject-to' deals that leave the seller's loan in place carry this acceleration risk.

Replacing your existing mortgage with a larger one and receiving the difference in cash. Investment-property cash-out loans are typically capped at 70-75% LTV and priced slightly above rate-and-term refinances.

A revolving, usually variable-rate credit line secured by your equity and sitting behind your first mortgage. It leaves a low-rate first mortgage untouched, which is why it often beats a cash-out refinance when your existing rate is below market.

Prepaid interest paid at closing to lower the rate. One point equals 1% of the loan amount. Points make sense when the monthly savings repay the cost well before you expect to sell or refinance.

Closing costs the seller agrees to pay on the buyer's behalf. FHA allows up to 6% of the price; conventional limits range from 3% to 9% depending on down payment and occupancy.

The appraiser's estimate of market rent for each unit (Form 1007 for single units, Form 1025 for 2-4 unit properties). Lenders use 75% of this figure, not your own projections, for qualifying income and the FHA self-sufficiency test.

Liquid funds a lender requires you to hold after closing, expressed in months of PITIA. Multi-unit and investor loans commonly require 3-6 months; some DSCR programs waive reserves above a 1.50 ratio.

A fee for paying off a loan early, common on DSCR and commercial-style loans. Step-down structures (for example 3-2-1) charge 3% of the balance in year one, 2% in year two, and 1% in year three.

Annual income after vacancy and all operating expenses (taxes, insurance, utilities, repairs, reserves, management) but before mortgage payments, income taxes, and depreciation. Every valuation metric is derived from it.

Example: $36,096 of effective gross income minus $18,932 of operating expenses is $17,164 of NOI.

Total annual rent if every unit were occupied all year at the scheduled rent, plus other income such as laundry, parking, and storage. The top line of the NOI waterfall.

GSI minus vacancy and credit loss. Small residential properties typically lose 5-10% of GSI to turnover and non-payment; EGI is the income you can actually plan around.

NOI divided by purchase price: the property's unlevered yield. It compares buildings regardless of financing and, inverted, estimates value (Value = NOI ÷ market cap rate). Higher cap rates usually signal more risk or weaker growth expectations.

Example: $32,000 NOI on a $530,000 fourplex is a 6.0% cap rate.

Annual pre-tax cash flow (NOI minus debt service) divided by the total cash you invested (down payment, closing costs, and initial repairs). It measures what your dollars earn after financing, which cap rate ignores.

Example: $3,600 of cash flow on $147,500 invested is a 2.4% cash-on-cash return.

A screening heuristic: monthly rent should be at least 1% of the purchase price. It is a rent-to-price test that ignores expenses entirely, useful for sorting listings quickly, dangerous as a buying rule.

Example: A $210,000 duplex renting $2,100 a month passes; the same rent on a $300,000 price is 0.7% and fails.

A back-of-envelope expense assumption: operating expenses (excluding the mortgage) consume about half of gross income. Real buildings range from 30% (new, separately metered) to 65% (old, master metered), so it is a sanity check, not an underwriting input.

A unit-by-unit list of tenants, lease dates, current rents, and deposits. Audit it against the actual leases and the T-12; the lease wins any conflict.

The property's actual income and expenses for the past 12 months. More reliable than a pro forma, but still a seller's document: normalize management, add a CapEx reserve, and re-estimate post-sale taxes before trusting its NOI.

Spending that replaces or substantially improves a long-lived component: roof, boiler, windows, sewer lateral. Underwrite a reserve of 8-12% of GSI on pre-1980 buildings (5-8% on newer stock), or build a component-based reserve study.

Income lost to empty units and unpaid rent, modeled as a percentage of GSI. Never underwrite 0%; even excellent buildings turn over.

Total operating expenses divided by effective gross income. A healthy small multifamily deal usually runs 35-50%; a seller claiming 20% is deferring maintenance or omitting lines.

Purchase price divided by annual gross rent. A quick comparison metric like the 1% rule (a 1% property has a GRM of about 8.3); it ignores expenses and financing.

The expected market value after planned renovations, based on comparable sales of updated properties. Used to size rehab budgets and refinance proceeds in value-add and BRRRR strategies.

Paying a loan down through scheduled principal and interest payments. Early payments are mostly interest; refinancing restarts the schedule, which is why total remaining interest, not just the monthly payment, decides whether a refinance makes sense.

Buying a 2-4 unit property with owner-occupied financing, living in one unit, and renting the others so tenant rent offsets most of your housing cost while you build equity.

Example: A $2,899 duplex PITIA offset by $1,400 of rent is a $1,499 net housing cost.

Allocating a master-metered utility bill among tenants by a formula (occupants, square footage, or fixtures) instead of individual meters. Legal in many jurisdictions with a written lease addendum and cost-only billing; restricted or prohibited in some.

Installing a meter per unit so each tenant pays for actual consumption. More expensive up front than RUBS, more defensible, and rewarded by appraisers and buyers.

A single utility meter for the whole building, with the owner paying the bill. Master-metered buildings carry 3-6 points of extra expense load and are worth less than separately metered equivalents.

Excess liability coverage that pays after your landlord policy's liability limit is exhausted. A $1 million umbrella typically costs a few hundred dollars a year and requires a minimum underlying limit.

The written notice the Fair Credit Reporting Act requires when you deny an applicant, charge a higher deposit, or take other adverse action based on a consumer report. It must identify the reporting agency and the applicant's rights.

Funds held against unpaid rent or damage. State law caps amounts, dictates whether they must be held in a separate or interest-bearing account, and sets return deadlines. Deposits transfer to the buyer at closing.

The annual deduction for the building's cost (not land) over 27.5 years using the straight-line method and mid-month convention. It is claimed whether or not you take it, so skipping it only wastes the deduction.

Example: A $288,150 building basis produces $10,478 of depreciation per year.

Tax owed on sale for depreciation previously deducted (or allowable), at a maximum federal rate of 25% for real property. A 1031 exchange defers it along with capital gain.

An engineering-based study that reclassifies parts of a building's basis into 5-, 7-, and 15-year property so more depreciation lands in the early years, especially when combined with bonus depreciation.

A like-kind exchange under IRC Section 1031 that defers capital gains and recapture when you sell investment real estate and reinvest through a qualified intermediary, identifying replacements within 45 days and closing within 180.

Anything of value received in a 1031 exchange that is not like-kind real estate, such as leftover cash or a reduction in mortgage debt. Boot is taxable in the year of the exchange even if the rest is deferred.

The independent third party that holds sale proceeds and acquires the replacement property in a 1031 exchange. Touching the money yourself, even briefly, disqualifies the exchange.

The IRS form (attached to Form 1040) where rental income and expenses are reported by property. Each deductible line, from advertising to depreciation, has its own entry.

Rental losses are passive by default and offset only passive income, except that active participants with modified AGI under $100,000 may deduct up to $25,000 against ordinary income (phasing out by $150,000). Suspended losses carry forward.

An annual election letting you expense items costing $2,500 or less per invoice or item (with a written capitalization policy) instead of depreciating them.

For buildings with an unadjusted basis of $1 million or less, an election to expense repairs, maintenance, and improvements up to the lesser of $10,000 or 2% of the building's basis per year.

A sale where at least one payment is received after the tax year of sale, which lets the seller spread capital gains over the years payments arrive. It is the tax logic behind most seller-financing offers.