Lending Glossary

Key terms

Click on the following terms to learn more about lending:

Amortization:

The structured repayment schedule of a mortgage loan showing how each monthly payment is divided between interest owed and reduction of the loan’s principal balance. Early in the loan term, a larger portion of each payment typically goes toward interest, while later payments reduce more of the principal.

Annual Percentage Rate (APR):

A broader measure of the cost of borrowing that includes the interest rate plus certain lender fees and costs, expressed as a yearly percentage. APR allows borrowers to compare loan offers more comprehensively than interest rate alone.

Appraisal:

An independent, third-party evaluation of a property’s market value ordered during the mortgage process to confirm that the home supports the requested loan amount.

Appraised value:

The value assigned to a property by a licensed appraiser based on market data, comparable sales, and property condition.

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Closing:

The final stage of a mortgage transaction when all required documents are signed, loan funds are disbursed, and (in a purchase) ownership transfers to the buyer.

Closing costs:

The total fees and expenses required to finalize a mortgage loan, which may include lender charges, title services, government recording fees, prepaid taxes, and insurance.

Conditional approval:

An underwriting decision indicating the borrower meets preliminary approval standards, subject to satisfying specific documentation or verification requirements before final approval.

Debt-to-income ratio (DTI):

A calculation comparing a borrower’s total monthly debt obligations to their gross monthly income, used by lenders to evaluate repayment capacity.

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Deed of trust / Mortgage instrument:

The legal document securing the loan against the property, giving the lender certain rights in the event of default. Terminology varies by state.

Disclosure package:

A set of required documents provided early in the mortgage process outlining estimated loan terms, borrower rights, and important regulatory notices.

Down payment:

The portion of the home’s purchase price paid upfront by the borrower, reducing the amount financed through the mortgage.

Earnest money:

A deposit made by a buyer when entering a purchase contract to demonstrate serious intent to buy the property.

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Escrow account:

An account established by the lender to collect and hold funds for property taxes and homeowner’s insurance, which are paid on the borrower’s behalf when due.

Fixed-rate mortgage:

A mortgage loan where the interest rate remains unchanged for the entire term of the loan, resulting in consistent principal and interest payments.

Interest rate:

The percentage charged by the lender for borrowing the loan amount, which directly impacts the borrower’s monthly payment and total repayment amount.

Loan estimate (LE):

A standardized form provided within three business days of application that outlines estimated loan terms, projected payments, and closing costs.

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Loan-to-value ratio (LTV):

The percentage relationship between the loan amount and the property’s appraised value or purchase price, used by lenders to assess risk.

Mortgage insurance (MI/PMI):

Insurance that may be required when the borrower’s down payment is below certain thresholds, protecting the lender in the event of default.

Points (Discount points):

Upfront fees paid to the lender to reduce the interest rate on a mortgage. One point is equal to 1% of the loan amount. They are essentially prepaid interest. For refinances, points can be rolled into the loan amount.

Preapproval:

A lender’s initial evaluation of a borrower’s financial profile indicating a potential loan amount, subject to full underwriting review and verification.

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Prepaid items:

Upfront payments collected at closing for expenses such as property taxes, homeowners insurance, and daily interest accrual.

Price lock (Rate lock):

A commitment from a lender guaranteeing a specific interest rate for a set period of time, usually 30 to 60 days. This protects the borrower from rate increases during the application and closing process.

Principal:

The original amount borrowed under the mortgage loan, excluding interest, fees, and other charges.

Refinance:

The process of replacing an existing mortgage with a new loan, often to change the interest rate, term, loan structure, or access home equity.

Title insurance:

Insurance that protects the lender (and optionally the homeowner) against losses resulting from defects in the property’s title or ownership history.

Underwriter:

The financial expert who reviews the loan application and determines if the applicant is creditworthy and if the property meets the lender's guidelines. They make the final decision to approve or deny a loan. This process is automated initially with a human reviewer.

Underwriting:

The formal evaluation process in which the lender reviews credit, income, assets, debts, and property information to determine whether the loan meets approval standards.

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