Loan Glossary

A legal commitment by a business owner to personally repay a business loan if the business cannot. Required for most SBA loans and many commercial loans. Puts personal assets at risk.

Principal, Interest, Taxes, and Insurance — the four components of a monthly mortgage payment. Lenders use PITI to calculate housing expense ratios for loan qualification.

Insurance required on conventional loans when the LTV exceeds 80%. PMI protects the lender if the borrower defaults. It can be removed when equity reaches 20%.

Prepaid interest paid at closing to reduce the mortgage interest rate. Each point costs 1% of the loan amount and typically reduces the rate by 0.25%. Also called "buying down the rate."

A lender's conditional commitment to lend a specific amount, based on verified income, assets, and credit. Pre-approval (stronger than pre-qualification) shows sellers the buyer is creditworthy.

An informal estimate of how much a borrower may be able to borrow, based on self-reported information without full verification. Less reliable than pre-approval.

A fee charged by some lenders if the borrower pays off the loan early (fully or through large extra payments). More common on commercial loans and hard money loans.

The original amount borrowed on a loan, or the remaining balance owed. Principal decreases as the borrower makes payments. Interest is calculated on the outstanding principal balance.

An individual or non-bank entity that provides loans outside of traditional banking channels. Private lenders typically charge higher rates but can move faster and offer more flexible terms.

A legal document signed by the borrower promising to repay the loan under specific terms including the interest rate, repayment schedule, and consequences of default.