The terms that lenders use when you’re applying for a mortgage can seem bewildering. What’s an APR? What’s the difference between pre-qualify and pre-approve? Here’s a glossary.
Annual percentage rate or APR: The total annual cost of your mortgage, factoring in the fees charged to get the loan, such as charges by your lender to administer the loan.
Application fee: The cost of submitting an application for a loan.
Credit report: A statement from a credit bureau judging your creditworthiness, considering whether you’ve missed payments, how much you owe, how many credit cards and loans you have and if your total debt is from just credit cards or a mix of loans like car loans.
Interest rate: The amount of money a lender will charge, over time, for you to repay a mortgage. It is charged so the repaid amount is adjusted for inflation over the long repayment of the loan and as part of the lender’s profit.
Origination fees: The fees that a lender charges for “originating,” or making the loan. They include administrative services, such as processing applications.
Points: Cash that you pay up front, usually a fraction of a percent of the mortgage, in exchange for the lender lowering your interest rate. They are calculated as a percentage of the loan amount.
Pre-approval: A more thorough review of your financial documents and credit reports that can culminate in a tentative agreement by a lender to give you a loan. A pre-approved mortgage makes offers more attractive to sellers because it indicates a reasonable assumption that the buyer will be able to qualify for a mortgage.
Pre-approval letter: A document from a lender stating that they have reviewed your financial history and find you a good candidate for a mortgage on a home in your price range.
Pre-qualify: A quick estimate by a lender of your ability to get a mortgage. It involves a lender informally reviewing your financial documents and credit reports. It is less weighty than pre-approval and serves as a good starting point for someone considering whether to purchase a home.
Underwriting: The process by which your lender verifies your financial information and evaluates the risks of making the loan.
W-2: A federal tax form that states your earnings for the year and itemizes what you had deducted, ending in your take-home pay. A lender will use your earnings to calculate your debt-to-income ratio.
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