Mortgage Lending Glossary

Amortization – The process of paying off a loan over time through regular payments that include principal and interest.

Annual Percentage Rate (APR) – The total cost of a loan, including interest and fees, expressed as a yearly percentage.

Appraisal – A professional assessment of a home’s market value, required by lenders to determine the loan amount.

Closing Costs – Fees associated with finalizing a mortgage, such as lender fees, title insurance, and prepaid taxes.

Debt-to-Income (DTI) Ratio – The percentage of a borrower’s monthly income used to pay debts, which helps lenders determine loan eligibility.

Down Payment – The upfront amount a borrower pays toward the home purchase, typically ranging from 3% to 20%.

Earnest Money Deposit (EMD) – A deposit made by the buyer to show serious intent to purchase a home; it’s applied to closing costs or the down payment.

Escrow – A third-party account used to hold funds for property taxes, homeowner’s insurance, and sometimes earnest money.

Fixed-Rate Mortgage – A loan with an interest rate that remains the same for the entire term.

First-Time Homebuyer Programs – Special loan programs offering lower down payments, grants, or assistance for first-time buyers. Common options include FHA loans, VA loans, and USDA loans.

FHA Loan – A government-backed loan with lower credit and down payment requirements, ideal for first-time buyers.

Gift Funds – Money received as a gift from a relative or approved donor to help cover down payment or closing costs.

Home Inspection – A detailed property evaluation by a professional to identify any issues before purchase (different from an appraisal).

Homeowner’s Insurance – Required coverage that protects against damage or loss of the home.

Loan Estimate (LE) – A document provided by the lender outlining estimated costs, terms, and payments for the mortgage.

Mortgage Insurance – Required for loans with less than 20% down, it protects the lender in case of borrower default. Includes PMI (Private Mortgage Insurance) for conventional loans and MIP (Mortgage Insurance Premium) for FHA loans.

Pre-Approval – A lender’s conditional commitment stating how much a borrower qualifies to borrow, based on income, credit, and assets.

Principal – The original loan amount borrowed, excluding interest.

Rate Lock – An agreement with the lender to "lock in" a specific interest rate for a certain period, protecting against market fluctuations.

Refinancing – Replacing an existing mortgage with a new loan, often to secure a lower interest rate or change loan terms.

Title – Legal ownership of a property. A title search ensures no legal claims against the home before purchase.

Underwriting – The lender’s review process to assess the borrower’s financial health and risk before approving the loan.

USDA Loan – A zero-down-payment loan option for eligible rural and suburban homebuyers.

VA Loan – A mortgage available to eligible veterans and active military members, often with zero down payment and no PMI.