The mortgage industry has language used exclusively within the world of mortgage lending. Yes, it can be daunting, especially with such a big investment involved.
Here’s a quick list of basic terms you may come across while taking on the home buying/refinancing process. Knowing their meanings can go a long way to creating a smoother process for you.
This is the percentage that results when the amount you owe on the loan is divided by the home’s value. For example, if your loan is for $80,000 on a $100,000 home, your loan-to-value would be 80,000 divided by 100,000, or 80%. It also means you have 20% equity in your home.
When you apply for a loan, LTV is taken into account and used to determine several things, depending on the mortgage program you’re using. For most programs, you’ll need a certain minimum credit score to qualify for a higher loan-to-value.
A formula (the sum of all monthly debt divided by gross monthly income) used to compare certain debts you have to your gross income. Let’s say you make $4,000 a month before taxes. This is your gross monthly income. If you have a car payment of $400 a month along with a house payment of $1,200 a month, as well as a minimum monthly payment on your credit cards of $250, your total monthly expenses is $1,850. To establish your debt-to-income ratio, divide your monthly debt payment by your monthly income. The result is your debt-to-income ratio.
Monthly income: $4,000
Monthly debt payment: $1,850
Debt-to-income ratio: $1,850/$4,000 = 46%
This helps lenders determine what size mortgage payment a borrower can afford.
A type of prepaid interest mortgage borrowers can purchase to lower the amount of interest to be paid on payments. Each point usually costs about 1% of the total loan amount and can lower your interest rate by one-eighth to one-quarter of your interest rate. For example, with a $200,000 loan, each point would cost $2,000. If the interest rate on the mortgage is 5% and each point lowers the rate by 0.25%, if you bought two points, it would cost you $4,000 and lower your interest rate to 4.50%. In a low-rate environment, you’ll rarely need to pay points.
The expenses over and above the price of the property that buyers/sellers often incur during the completion of a real estate transaction. See Buying a Home 101 for a list of examples. These are also known as settlement costs.
PMI (Private Mortgage Insurance)
Lender insurance placed on loans when the loan balance exceeds 80% of the home’s value. PMI protects the lender against loss if the borrower defaults and allows the borrower to make a smaller down payment.
Credit Rating (FICO Score, Credit Score)
A number assigned to you by each of the three major credit-reporting agencies: Experian, TransUnion, Equifax. It’s based on your past management of credit accounts.
GFE (Good Faith Estimate)
An estimate of the charges for your loan that must be provided by the lender as required by the Real Estate Settlement Procedure Act. As the name indicates, it’s only an estimate; the true figure can turn out to be different.
TIL (Truth In Lending)
A disclosure that must be presented to the borrower before credit is extended. It shows your Annual Percentage Rate (APR), and payment breakdown over the life of the loan.
If you really want to add to your mortgage vocabulary, visit our Glossary for hundreds of terms.
Mortgage Solutions, LLC, can help you out with all the mortgage lingo and a whole lot more.
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Mortgage Solutions, LLC, is a wholly-owned subsidiary of Vantage Credit Union.
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