“4 Basic Mortgage Terms”

To ensure that you will get the best loan available, you should at least understand some basic mortgage terminology. Here are four important terms that your lender will likely use when explaining a loan approval to you:

1. LTV (Loan-to-Value) Ratio

LTV ratios are determined by dividing your loan amount by the lesser of the sales price or appraised value. Say you were buying a home worth $100,000 that is selling for its full value, and you were going to put down $20,000. Since you would be borrowing $80,000, you end up with a loan-to-value (LTV) ratio of 80%. Keep in mind, the higher your loan-to-value ratio is the riskier it is to lend you money. Because of this fact, qualifying for high LTV loans is generally a more extensive process, and the loan you get approved for will generally have higher monthly payments than low LTV loans.

2. DTI (Debt-to-Income) Ratios

Your Debt-to-Income ratio is calculated by dividing your gross monthly income by your total monthly debt. Mortgage lenders will look at two different debt ratio numbers: your “front end” ratio and your “back end” ratio. Your front end ratio is calculated by dividing your proposed mortgage debt by your gross monthly income. Your back end ratio is your new mortgage payment plus all of your other monthly debt divided by your gross monthly income. Generally, lenders are looking for your back end ratio to be 50% or less; however, there are programs available that will approve you with a back end ratio up to 65%. You should be aware, though, that your DTI ratio does not include monthly bills that do not report to the credit bureaus; therefore, you will want to make sure that you can afford your monthly bill load comfortably once those bills are added in.

3. Escrow

When you escrow your taxes, you are basically asking your lender to add on enough money to your monthly payment so that they can pay your real estate taxes and homeowner’s insurance for you when they are due. The lender will take what you owe for each bill, divide it by twelve, and then add that amount to your monthly payment. You should note that when closing a new mortgage where you plan to escrow your taxes, you may need a little more money at settlement as the lender will need to build a buffer into your account so that they will have the total needed when your tax and insurance bills are due.

4. PMI (Private Mortgage Insurance)

PMI is an insurance policy that conventional mortgage lenders mandate you to pay for when you exceed 80% LTV. This fee can be as much as several hundred dollars and is in place to cover your lender’s losses if you fail to pay. To avoid this extra cost, lenders will often offer you an 80/20 piggyback mortgage or a sub-prime loan with a higher interest rate but a cheaper payment due to the absence of this non-beneficial insurance.

It is our hope that understanding these four terms will help you as you enter the mortgage marketplace; however, they represent only a fraction of the elements that go into each mortgage loan. If you have any questions about what you have read here, or if you would like to discuss other facets of the mortgage process, please feel free to call us toll free 1-888-383-5363 or simply fill out the question box below. We will be glad to help you in any way we can. There is never any obligation, and there are no fees associated with simply answering your questions.