Applying for a mortgage can be stressful, what with all the money that’s on the line. Oh, and the possibility that you could be denied entirely, perhaps while starting a family or attempting to relocate to a new state.
Making matters worse is the fact that all types of new words are thrown your way, which aside from being confusing, can make it difficult to negotiate a great rate on your home loan.
If you don’t know what the salesperson is talking about, how are you going to make your case for a better rate or lower fees?
My central message here at TTAM has always been empowerment through knowledge, with the reward being a better mortgage, whether it’s a lower interest rate, fewer closing costs, or simply the right product.
If you’re new to mortgage, you’ve probably got a lot of questions, and even if it’s not your first time, it never hurts to brush up on the basics.
Let’s discuss some of the more common mortgage lingo you might hear as you navigate the mortgage market, what the words mean, and how knowing them could save you some dough!
Let’s start with what’s arguably the most important mortgage-related term out there; your FICO score. I say that because it can greatly impact what mortgage rate you ultimately receive, which can affect your wallet in a major way each and every month.
If you’re applying for a mortgage, you’ve probably already heard of a FICO score, but you might not know just how much weight it carries.
Simply put, it can mean the difference between a rate of say 4% and 6% on a mortgage, depending on all the attributes of the loan. So it’s nothing to take lightly, and something you should be well-versed on before you begin the process.
I’ve already written about mortgage credit score requirements extensively, but one key takeaway is that a credit score of 740 or higher will generally give you access to the lowest interest rates and most financing options.
Similarly crucial is your loan-to-value ratio, also known as LTV in industry terms. It too is a huge driver in determining your mortgage rate, with lower LTVs typically resulting in lower interest rates.
You can calculate your LTV by dividing the loan amount by the value of the property.
So if you put $60,000 down on a $300,000 home, the LTV would be 80%. It happens to be a key threshold to avoid mortgage insurance and secure lower rates.
When a lender qualifies you for a mortgage, they’ll do some calculations to determine affordability. The major one is your debt-to-income ratio, or DTI, which is calculated by dividing your monthly liabilities by your monthly gross income.
If you spend $4,000 a month on housing and other costs like an auto loan/lease and credit cards, and make $10,000, your DTI would be 40%. Generally, you want it below 43% to qualify.
Mortgage lenders will often use require a home appraisal to determine the value of your property as it’s the collateral for the loan.
While appraisal waivers are becoming more and more possible these days, you’ll likely be on the hook for the cost of the appraisal when applying for a home loan.
Cost aside, it’s very important that the property comes back “at value” to ensure your loan can close without delay, or worse, an increased down payment to make it work.
It stands for Federal Housing Administration, which bills itself as the largest mortgage insurer in the world, with a portfolio that exceeds $1.3 trillion at last glance.
They insure the many FHA loans borrowers take out to finance their home purchases. Their signature loan is the 3.5% down payment mortgage.
The U.S. Department of Veteran Affairs provides a similar guarantee to lenders that issue mortgage loans to veterans and active service members, which allows them to offer more favorable terms to those who protect our country.
The signature loan is a zero down payment mortgage that also comes with a low interest rate, limited closing costs, and no mortgage insurance requirement.
While they’re perhaps better known for juicy steaks, the USDA also runs a pretty significant home loan program that provides 100% financing to home buyers.
The caveat is that the property must be located in a rural area in order to be eligible for financing – but many areas throughout the United States hold this distinction, even if not too far from major metropolitan areas.
If the loan is a conventional one, meaning non-government, it’s probably backed by either Fannie Mae or Freddie Mac, which are the two government-sponsored enterprises (GSEs).
These two private, yet government-controlled companies (since the latest housing crisis), back or purchase the majority of home loans originated by lenders today.
They allow down payments as low as 3% with credit scores down to 620.
While the down payment requirement is slightly below that of the FHA, their credit score requirement is quite a bit higher.
It stands for private mortgage insurance, and applies to most home loans with an LTV above 80%. It protects the lender, not you, from default, and can be quite costly.
Yet another reason to come in with a larger down payment when obtaining a mortgage. If you can avoid it, you might be able to significantly lower your monthly housing payment.
The mortgage insurance equivalent for FHA loans is known as MIP, and includes both an upfront premium (typically financed into the loan amount) and an annual premium, paid monthly.