Glossary of Key Terms
Plain-language definitions for buyers looking for an owner-occupied 2-4 unit property
These are straightforward definitions of terms you will run into when financing, buying, and running a 2-4 unit owner-occupied property. Each definition is based on the official source listed. Loan program rules can change, so confirm current details with your lender.
Owner-Occupied
A property where the owner lives in one of the units as their primary residence. Under FHA rules, at least one borrower must move in within 60 days of closing and live there for at least one year.
Source: HUD, FHA Single Family Housing Policy Handbook 4000.1
Multifamily Property
A residential building containing two or more separate housing units. A 2-4 unit property (duplex, triplex, or fourplex) falls under this classification, as distinct from a single-family structure.
Source: U.S. Census Bureau, Building Permits Survey — Classification FAQ
Accessory Dwelling Unit (ADU)
A separate, habitable living unit with its own kitchen, sleeping, and bathroom space, either attached to or detached from the main dwelling. An ADU is part of the same property and is not typically sold separately.
Source: HUD, FHA Single Family Housing Policy Handbook 4000.1 — Glossary
Down Payment
The portion of the purchase price you pay upfront in cash, rather than financing through your loan. The size of your down payment affects your loan terms, including whether you’ll need private mortgage insurance.
Source: CFPB, Your Down Payment Decision
Private Mortgage Insurance (PMI)
Insurance that protects the lender, not the borrower, if the borrower stops making payments. It is generally required on a conventional loan when the down payment is less than 20% of the purchase price.
Source: CFPB, What Is Private Mortgage Insurance?
Debt-to-Income Ratio (DTI)
All of your monthly debt payments divided by your gross monthly income. Lenders use this figure to help decide how much you can borrow.
Source: CFPB, What Is a Debt-to-Income Ratio?
Debt Service Coverage Ratio (DSCR)
The ratio of a property’s net cash flow to its debt payments (principal and interest). This ratio is used mainly in investment-property lending, where a property is expected to cover its own loan payments through rental income. It is different from the owner-occupied financing programs most first-time buyers of 2-4 unit properties use.
Source: Fannie Mae Multifamily Guide, Calculating the DSCR and LTV
Cash-on-Cash Return
A measure of the cash income a property produces each year compared to the actual cash you invested in it, expressed as a percentage. Formula: Annual pre-tax cash flow divided by total cash invested. This is a widely used investment metric across the real estate industry. It does not have an official government definition; the source below is one common industry explanation.
Source: Rocket Mortgage, Cash-on-Cash Returns: What Does It Mean in Real Estate?
Escrow Account
An account your loan servicer sets up and controls to pay property taxes and insurance premiums on your behalf. A portion of your monthly mortgage payment goes into this account instead of you paying those bills yourself in one lump sum.
Source: CFPB, What Is an Escrow or Impound Account?
Closing Costs
The fees charged when you finalize your home purchase and loan, including origination fees, appraisal fees, and title insurance. Origination and title-related fees are typically the largest categories.
Source: CFPB, What Fees or Charges Are Paid When Closing on a Mortgage and Who Pays Them?
Earnest Money
A deposit a buyer pays to show good faith on a signed purchase contract. It is held by the seller or a third party, such as a title company, and is generally applied toward the down payment or closing costs at closing.
Source: CFPB, Mortgages Key Terms
Title Insurance
Insurance that protects against claims on the property from before you purchased it, such as unpaid taxes or unpaid contractors. Lender’s title insurance protects the lender; owner’s title insurance, which is optional but recommended, protects your own financial interest in the home.
Source: CFPB, What Is Owner’s Title Insurance?
Appraisal
A written, independent opinion of what a property is worth. Lenders order an appraisal to confirm the loan amount is appropriate for the property’s value. This is different from a home inspection, which evaluates the property’s physical condition.
Source: CFPB, What Are Appraisals and Why Do I Need to Look at Them?
Fannie Mae HomeReady Mortgage
A conventional loan program for 1-4 unit owner-occupied properties, designed for borrowers with qualifying income at or below 80% of the area median income (AMI). Rental income (75% of actual or expected) from the other units in a 2-4 unit property may count toward qualifying income under program rules.
Source: Fannie Mae, HomeReady Mortgage Loan and Borrower Eligibility (Selling Guide B5-6-01)
Freddie Mac Home Possible Mortgage
A conventional loan program offering down payments as low as 5% on owner-occupied 2-4 unit properties for borrowers who meet income limits (generally 80% of area median income). Rental income (75% of actual or expected) from the other units can be used toward qualifying, subject to program rules.
Source: Freddie Mac, Mortgages for 2- to 4-unit Properties
FHA Loan
A mortgage insured by the Federal Housing Administration, available for 1-4 unit properties. FHA loans require the borrower to occupy the property as a primary residence within 60 days of closing and for at least one year.
Source: HUD, FHA Single Family Housing Policy Handbook 4000.1
Fair Housing Act
The federal law that prohibits discrimination in renting, buying, or financing housing based on race, color, religion, sex, national origin, disability, and familial status (households with children). It applies to how you advertise units, screen tenants, and treat applicants.
Source: HUD, Fair Housing Act Overview
Familial Status
One of the protected classes under the Fair Housing Act. It protects households with one or more children under 18, pregnant applicants, and people in the process of gaining custody of a child, from housing discrimination.
Source: HUD, Fair Housing Act Overview
Lead-Based Paint Disclosure
A federal requirement that sellers and landlords of housing built before 1978 disclose any known lead-based paint hazards and provide buyers or renters with an EPA information pamphlet before completing the sale or lease.
Source: EPA, Real Estate Disclosures About Potential Lead Hazards