Mortgage Lingo Phrases to Know
Listening to a mortgage-industry professional can be like trying to decipher a foreign language. What does all the mortgage lingo mean? How does it apply to your specific financial situation? How can you feel comfortable making what is potentially the biggest financial investment of your life if you don’t even understand the terminology that’s being used? We get it, and we’re here to help. Here’s a list of commonly-used mortgage lingo and what it means.
Debt-to-income ratio, or DTI, is the total percentage of your debts divided by your income. Debts include monthly obligations such as mortgages, car loans, student loans, credit cards, etc. Your Mortgage Advisor will pull your credit report (with your permission), as well as interview you, to determine what your total debts are. Your income comes from various sources, and you’ll provide documentation to prove how much you earn each month. DTI is a factor in your loan approval, as various loan programs have different maximum DTI allowed.
Loan-to-Value, or LTV, is the total percentage of your loan amount divided by the appraised value of your home. For example, if your loan amount is $300,000 and your home’s appraised value is $400,000, then your LTV is 75%. LTV is a factor in your loan approval because various loan programs have different maximum LTV limits. LTV also comes into play when we discuss Mortgage Insurance, which is coming up next in the mortgage lingo list.
Mortgage Insurance (MI)
Mortgage Insurance (MI) is a policy that lowers the risk of making a loan to applicants who are putting down less than 20% of the purchase price. MI is required on conventional loans with a down payment less than 20% and is also typically required on FHA and USDA loans. With a conventional loan, the lender arranges for MI with a private company. Private Mortgage Insurance (PMI) rates will vary based on down payment amount and credit score. Generally speaking, PMI is cheaper than FHA MI for consumers with good credit. Most often, PMI is paid monthly. It’s also possible to get a PMI policy where the entire amount of the MI is paid up-front as part of the closing costs, or financed into the loan amount. For even more detail about Mortgage Insurance, check out our full blog post here.
Mortgage Insurance Premium (MIP) and Up-Front Mortgage Insurance Premium (UFMIP) are both terms associated with government loans (USDA, FHA, and VA). Just like with MI, MIP is paid monthly with your mortgage payment. Unlike MI, the premium amount for MIP is a pre-set percentage of the loan amount, and it doesn’t vary based on your credit score or DTI. UFMIP is an up-front fee paid at closing or financed into the loan amount. Most government loans have both MIP and UFMIP.
PITI is short for Principal, Interest, Taxes, and Insurance. This is essentially everything that goes into your monthly mortgage payment, with the exception of possible Mortgage Insurance or Homeowners’ Association Dues. When a Mortgage Advisor discusses your mortgage payment with you, it’s important to make sure they clarify if they’re talking about PITI or just the Principal and Interest portion of the payment.
Adjustable Rate Mortgages are known as ARMs. These are mortgages where the interest rate starts at one number and then adjusts at set periods over the life of the loan. When you apply for an ARM, the lender is required to provide you with some additional disclosures which outline the specifications on how often the rate can adjust, and what the maximum potential rate could be.
An FRM is a Fixed Rate Mortgage. This means that the interest rate stays the same throughout the life of the loan. Fixed rate mortgages most often have 30, 20, or 15-year terms. Fixed rate loans are also considered far less risky than ARMs since the payment is more stable.
Technically speaking, FICO stands for Fair Issac Co, which is a company that specializes in predictive analytics. However, most often when you hear the term FICO, the person who says it is likely just referencing your middle credit score. There are three major bureaus or credit reporting agencies who produce credit scores for mortgage loans, Equifax, Experian, and TransUnion. For more information about what components go into generating your FICO score, Credit.com has a great article here.
An appraisal report is a key component of almost every home loan transaction. The appraisal is an inspection done by a professional appraiser which confirms the current market value of the home. As we pointed out earlier, the appraised value is one of the key components in determining the LTV. Typically, a lender uses the services of one or more appraisal management company to obtain the appraisal report. Appraisal Management Companies (AMCs) are 3rd party contractors with no affiliation to the lender and are often contracted with multiple lenders at the same time.
Annual Percentage Rate (APR) is your interest rate stated as a yearly rate. An APR for a loan can include fees you may be charged, like origination fees. APR is important because it can give you a good idea of how much you’ll pay to take out a loan. Some people think interest rates and annual percentage rates are the same thing. While that’s typically true for credit cards, the terms have completely different definitions when it comes to mortgages.
An interest rate is the percentage of the principle that a lender charges you to borrow the money. So what is APR? Instead of just including the interest rate, APR can also include fees you may be required to pay to take out the loan. So APR gives you a better idea of the cost of the loan as a percentage. It’s important to realize that they’re different, checking both the interest rate and the APR when you’re considering taking out a loan.
An impound account, sometimes called an escrow account depending on where you live, pays certain property-related expenses, such as taxes and homeowners insurance. The money that goes into the account comes from a portion of your monthly mortgage payment. An escrow account helps you pay these expenses because you send money through your loan servicer every month instead of having to pay a big bill once or twice a year.
Many lenders require that you pay your taxes and insurance using escrow, so they can make sure that the bill gets paid. This is especially true if your LTV is over 80%. Your mortgage servicer manages the escrow account and pays these bills on your behalf. Sometimes, escrow accounts may also be required by law. Your property taxes and insurance premiums can change from year to year. Therefore, your escrow payment, and subsequently, your total monthly payment, will change accordingly. When this happens, you’ll receive a written notice from your loan servicer.
A home equity line of credit (HELOC) is a kind of mortgage on your home. Rather than pay monthly amounts and interest on the total credit line available, you pay only on the actual funds used to date. That makes it more similar to a credit card, because you can borrow specific amounts for specific reasons, and pay them off, with the freedom to borrow against the equity in your house more than one time all as part of the same loan.
Loan Estimate (LE)
A Loan Estimate is a multi-page form that details the financial specifics of the loan you requested. After applying for your mortgage, your lender must provide this Loan Estimate within three business days of receiving your application. Your Loan Estimate gives you all of the most pertinent information about your loan, so you know exactly what you’re getting into.
All lenders are required to use a standard Loan Estimate form with very clear language and layout, so you understand the implications of taking on a loan. If you are shopping different lenders or mortgage options, you can easily compare Loan Estimates and choose the right one for you.
Closing Disclosure (CD)
A Closing Disclosure (CD) is a multi-page form that provides final details about the mortgage loan you have selected. Your lender must provide this Closing Disclosure at least three business days before you close on the mortgage loan. The Closing Disclosure details the financial specifics involved with your mortgage. Your CD gives the most pertinent information about your loan, so you are prepared before your signing appointment.
All lenders are required to use a standard Closing Disclosure form with very clear language and layout, so you understand the implications of taking on a loan. The CD is formatted similar to the Loan Estimate you received during your loan process. Page 3 of the CD has a comparison section at the top which specifically outlines any changes between your most recent LE and the CD. The three-day window between the time you receive your Closing Disclosure and the time you sign your final paperwork is required by law. This allows you to compare your final loan info to the estimate shown in the Loan Estimate you previously received. The three days also gives you time to ask the lender any questions before you go to the closing table.
Do you have questions about these mortgage lingo terms or any other terms we didn’t address today? Fill out the form below or contact us today!