The first conversation with a lender can feel like it is happening in another language. Most of the vocabulary is simpler than it sounds. Keep this glossary nearby as you read your documents, and ask your loan officer to explain anything that still is not clear.
Getting approved
- Pre-approval. A lender’s conditional opinion, based on documents you provided, of how much you can borrow.
- Underwriting. The lender’s detailed review of your credit, income, assets and the property before final approval.
- Debt-to-income ratio (DTI). Your monthly debt payments divided by your gross monthly income.
- Conditions. Items the underwriter needs before giving final approval, such as an updated pay stub.
- Clear to close. The lender’s notice that all conditions are met and closing can be scheduled.
- Reserves. Savings left after closing, which some programs require.
The loan itself
- Principal. The amount you borrow, and the balance that remains over time.
- Interest. The cost of borrowing, expressed as an annual rate.
- APR. Annual percentage rate, which includes the interest rate plus certain fees, so it is useful for comparing offers.
- Amortization. The schedule by which each payment splits between interest and principal; early payments are mostly interest, later ones mostly principal.
- Term. The length of the loan, commonly fifteen or thirty years.
- Loan-to-value (LTV). The loan amount as a percentage of the home’s value.
- Rate lock. The lender’s commitment to hold your rate for a set period.
- Points. Fees paid at closing to lower the interest rate; one point is one percent of the loan amount.
- Private mortgage insurance (PMI). Insurance that protects the lender on conventional loans with smaller down payments; the borrower pays for it.
Costs and payments
- Closing costs. Fees and prepaid items paid at settlement, separate from the down payment.
- Escrow account. An account the lender uses to collect and pay property taxes and insurance along with your monthly payment.
- PITI. Principal, interest, taxes and insurance: the four parts of a typical monthly payment.
- Prepaids. Items paid in advance at closing, such as the first year of homeowners insurance and some months of taxes.
- Loan Estimate. The standardized form a lender gives you after you apply, showing the terms and estimated costs.
- Closing Disclosure. The final version of those figures, provided before closing for your review.
The property and the closing
- Appraisal. A licensed appraiser’s opinion of the home’s value, ordered by the lender.
- Title. The legal record of ownership; a title search looks for claims against it, and title insurance protects against undiscovered ones.
- Earnest money. A deposit made with your offer, credited toward your purchase at closing.
- Contingency. A condition in the contract that must be met for the sale to proceed, such as a satisfactory inspection.
- Deed. The document that transfers ownership, recorded with the county.
- Note. Your written promise to repay the loan; the mortgage or deed of trust is the document that pledges the home as security.
Terms vary slightly by state and by lender, and some documents go by different names in different places. When a word on your paperwork does not match this list, ask. A good loan officer or closing attorney expects questions and would rather answer them before closing than after.
More Terms You May Hear
Beyond the basics, a few more words tend to come up during a purchase. Some are specific to the contract, some to the loan, and some to life after closing.
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During the contract
- Due diligence period. In Georgia contracts, a negotiated window during which the buyer can complete inspections and other investigations.
- Seller’s disclosure. A form in which the seller shares what they know about the property’s condition.
- Amendment. A written change to the contract, such as an agreed repair or a new closing date.
- Survey. A professional map of the property’s boundaries and improvements.
- Homeowners association (HOA). An organization that manages shared areas and rules in some neighborhoods, usually funded by dues.
About the loan
- Conventional loan. A mortgage not insured or guaranteed by a government agency.
- FHA loan. A mortgage insured by the Federal Housing Administration, often used by buyers with smaller down payments.
- VA loan. A mortgage guaranteed by the Department of Veterans Affairs for eligible service members, veterans and certain surviving spouses.
- USDA loan. A mortgage backed by the U.S. Department of Agriculture for eligible properties in qualifying areas.
- Adjustable-rate mortgage (ARM). A loan whose interest rate can change after an initial fixed period, based on a set formula.
- Mortgage insurance premium (MIP). The mortgage insurance that applies to FHA loans.
After closing
- Servicer. The company that collects your payments and manages your escrow account. It may change during the life of the loan.
- Escrow analysis. A periodic review of your escrow account that may adjust your monthly payment if taxes or insurance change.
- Homestead exemption. A property tax exemption available for a primary residence. In Georgia, homeowners generally apply through their county, so check your county’s process and deadlines.
- Refinance. Replacing your current loan with a new one, often to change the rate or term.
How to Use This Glossary
A glossary is most helpful when it is used alongside your actual documents. A few tips:
- Read your Loan Estimate with this list nearby. Circle any word you are unsure about and ask your loan officer to explain it in context.
- Compare documents side by side. When the Closing Disclosure arrives, compare it with your Loan Estimate and ask about any differences.
- Keep a question list. Write questions down as they come up so nothing gets lost in a busy week.
- Ask for definitions in writing. When an answer matters, an email confirming it can be helpful later.
Terms People Often Confuse
- Interest rate vs. APR. The rate is what you pay to borrow; the APR includes certain fees and is better for comparing offers.
- Pre-qualified vs. pre-approved. A pre-qualification is an estimate; a pre-approval is based on documents.
- Earnest money vs. down payment. Earnest money is a deposit made with the offer; it is usually credited toward the down payment or closing costs.
- Appraisal vs. inspection. The appraisal estimates value for the lender; the inspection evaluates condition for the buyer.
- Title vs. deed. Title is the concept of ownership; the deed is the document that transfers it.
When in doubt, ask. Your loan officer, agent and closing attorney all expect questions, and none of them should make you feel rushed for asking.
