Mortgage terms 101: Your guide to home financing basics

Prequalification

Prequalification is an early look at how much you might be able to borrow, based on information like your income, estimated debts, and general credit picture. You typically will answer a few questions without submitting supportive documents to get an idea of your financial readiness. Because it’s based on unverified information, it’s an estimate rather than a guarantee, but it’s still a helpful first step toward understanding your budget and estimating how much home you may be able to comfortably afford.

Credit score

Your credit score is a number calculated by credit bureaus that reflects how you have managed debt in the past. Lenders use it to help determine whether you qualify for a mortgage, what interest rate you’ll receive, and whether you’ll need private mortgage insurance. A stronger score can make borrowing more affordable, giving you more flexibility as you shop for a home. You can check your credit score online through one of the three major credit reporting agencies: Equifax, Experian or TransUnion.

Debt-to-income ratio (DTI)

Your debt‑to‑income ratio is a snapshot of how much of your monthly income goes toward paying debts like credit cards, student loans, car payments, and your future mortgage. Lenders use it to understand how comfortably you can take on a new home loan while still managing your existing costs of living. A lower DTI generally means you have more room in your budget, which can make qualifying for a mortgage easier and open the door to more affordable options.

Preapproval

Preapproval is an early step in the mortgage process where a lender reviews verified financial documents showing your income, credit history, and debt to estimate how much you may be eligible to borrow. Preapproval is not a final loan commitment and is still subject to additional review, such as property appraisal and underwriting. But a preapproval letter provides a clearer picture of your potential purchase price range, and it also signals to sellers that you’ve taken steps toward financing.

Earnest money

Earnest money is a good‑faith payment you make after your offer is accepted to show you intend to buy a home. The money is held until closing and may be applied toward your down payment or closing costs. It helps strengthen your offer and signals your commitment while the final details of the sale are completed.

Closing costs

Closing costs include the fees and expenses required to finalize your mortgage loan and transfer ownership of the home. They may include lender fees, appraisal costs, title services, and prepaid items such as insurance or property taxes. Ask your lender to estimate these out-of-pocket expenses ahead of time so you can budget accordingly. Your lender will also provide a detailed closing disclosure outlining your final costs before closing.

Down payment

A down payment is the amount you pay toward the total cost of your home at closing. It’s usually a percentage of the home’s purchase price. The amount required can vary based on your loan type, credit score, debt-to-income ratio, and the kind of home you’re buying. First-time buyers may qualify for loan programs that allow lower down payments, sometimes starting around 3% down. Some government-backed loans, like VA and USDA programs, may even allow eligible buyers to buy a home with no down payment.

In general, the more you can put down, the less you’ll pay in interest and monthly costs. But every buyer’s situation is different. The goal is choosing an amount that feels comfortable and sustainable. 

Private mortgage insurance (PMI)

Rather than waiting to save for a larger down payment, buyers have the option to purchase a home with less than 20% down and pay a monthly mortgage insurance charge to the lender. PMI is added to your monthly mortgage payment and, for conventional loans, PMI can be removed once you’ve built enough equity in your home. Mortgage insurance requirements differ for government-backed loans. PMI increases your monthly payments, but it can also help you become a homeowner sooner without a large down payment.

Escrow

Escrow is a type of account maintained by the lender that you pay into each month alongside your mortgage. Your lender uses it to set aside money for big expenses, like annual property taxes and homeowners’ insurance, so those costs are covered when they’re due and you’re not hit with large, once‑a‑year bills. These accounts are sometimes optional but still recommended to make budgeting easier and avoid large expenses out of pocket. Any money remaining in this account after your taxes and insurance are paid is returned to you. 

Equity

Equity is the portion of your home that you truly own. It’s the difference between your home’s market value and the amount you owe on your mortgage loan. As you pay down your principal loan amount, your equity in the home increases. Over time, this becomes a powerful financial asset that can support your future goals. 

Amortization

Amortization is the schedule that shows how your mortgage is paid down to $0 during the loan term. Each monthly payment usually covers a mix of interest and principal. Because interest is based on the amount you still owe, more of your early payments go toward interest. As your balance decreases, less goes to interest and more goes toward your loan’s principal. That steady shift is how you build equity and move closer to owning your home outright, creating long-term value for you and your family. 

Refinancing

Refinancing is the process of replacing your mortgage with a new one, often to secure a lower interest rate, change your loan term, or switch between fixed and adjustable rates. Refinancing can help you reduce your monthly payment after your purchase or help you pay off your home faster, depending on your goals. Many homeowners refinance when market conditions or personal finances shift, making it a useful tool for long‑term planning.

Knowledge that opens doors

The more you understand mortgage terminology and how home financing works, the easier it is to move through each step with confidence.

No matter if your home is built indoors in a climate-controlled facility, on-site, or a combination of both, the financing process follows many of the same steps. Learning these terms can help you feel prepared, ask good questions, and make decisions that fit your goals.

At Clayton, we believe knowledge is one of the strongest foundations you can build on. When you’re ready to explore financing for your Clayton site-built, CrossMod®, or modern manufactured home, we’re here to help you take the next step toward a place that’s yours.