As a new homebuyer, there are many new acronyms you’ll come across during the mortgage process. You may have some trouble differentiating all the terms being thrown your way, but we’re here to help you decode them! Check out this list of 19 common mortgage acronyms you should know. This is just a portion of the terms out there, but don’t worry ¬– your loan officer will continue to educate you on all the mortgage lingo.
Let’s look at the most common acronyms to know before you begin the mortgage process:
1. APR – ANNUAL PERCENTAGE RATE
Your annual percentage rate is the interest rate plus other fees and costs involved in your loan, so it’s often greater than or equal to the interest rate. APR is a more accurate picture of your total cost to borrow. When shopping for a mortgage, be sure to look beyond the advertised interest rate. Lenders are required to disclose APR any time a rate is advertised, so that you can understand the “true” rate you are shopping for.
2. ARM – ADJUSTABLE RATE MORTGAGE
An adjustable rate mortgage is a mortgage in which the interest rate varies throughout the life of the loan. ARMs are not as common as fixed-rate mortgages, but they can be a great option for certain borrowers.
3. CD – CLOSING DISCLOSURE
The Closing Disclosure is a document issued prior to… you guessed it, your closing date. The CD is five pages and will provide all the final details of your mortgage, including your purchase price, closing costs, estimated taxes and insurance, and much more. It’s important to review this document thoroughly and ask any remaining questions to your loan officer before your scheduled closing date.
4. CTC – CLEAR TO CLOSE
Receiving the notice that your loan is clear to close is exciting news! This means an underwriter has reviewed all your loan documents and your outstanding conditions or requirements have been satisfied. Once a loan is clear to close your closing date can be scheduled, and you are that much closer to getting those new keys in hand.
5. DTI – DEBT-TO-INCOME
Your debt-to-income ratio is a percentage that indicates your monthly debts versus your gross monthly income. Generally, a DTI of 43% is the highest ratio a borrower can have to qualify for a mortgage, but this can vary by lender. To calculate your DTI, you start by adding up your monthly debt payments (including credit cards, student loans, mortgage, etc.). Then, you’ll divide this number by your monthly gross income. The resulting number will be a decimal, so multiply by 100 for your DTI percentage. If you have monthly debts of $1350 and monthly gross income of $3500, your DTI would be 39%.
6. FHA – FEDERAL HOUSING ADMINISTRATION
The Federal Housing Administration is a U.S. agency that offers mortgage insurance to FHA-approved lenders. FHA loans are a popular option for low-to-moderate income borrowers. Generally, FHA loans require a lower minimum down payment and lower credit scores than conventional loans, making them a popular option for first time home buyers.
7. FICO – FAIR ISAAC CORPORATION / FAIR, ISAAC AND COMPANY
Fair Isaac Corporation (originally Fair, Isaac and Company) is the company that created the first credit scoring model in 1958. Your FICO score is the credit score lenders use to determine your ability to repay a loan, and plays a factor in the interest rate and loan programs that you may qualify for. FICO scores are calculated based off your payment history (35%), debts owed (30%), length of credit history (15%), new credit (10%) and the diversity of credit types you have (10%).
8. HOA – HOMEOWNER’S ASSOCIATION
Homeowner’s Associations are organizations responsible for creating and enforcing rules for residents within communities or subdivisions, like a condominium complex or townhouse community. HOAs also oversee common areas and amenities. If you are considering the purchase of a condominium, townhouse, or similar community building, HOA fees will be an additional housing expense you need to consider when budgeting. HOA fees cover items like your water and sewage, lawn care, trash removal, maintenance, and repairs.
9. HOI – HOMEOWNERS INSURANCE
By purchasing Homeowners Insurance, your house or any belongings within it will be covered if you experience any losses or damages. Your policy will normally cover interior damage, exterior damage, loss or damage of personal belongings, and injury that occurs on the property. To obtain a mortgage, you will need to provide proof of homeowners insurance on the property you are purchasing. Homeowners insurance is different from mortgage insurance, mentioned later in this post.
10. HUD – U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
The Department of Housing and Urban Development is a Federal agency responsible for national policy and programs that address America’s housing needs, that improve and develop the Nation’s communities, and enforce fair housing laws. You can learn more at www.hud.gov.
11. LE – LOAN ESTIMATE
A Loan Estimate is a document that you will receive within three days of your loan application that contains details about your requested mortgage, including the program type and terms, projected payments, estimated closing costs and more. The Loan Estimate makes it easier for you to compare mortgage terms before you move forward in the process. This is a standard form that every lender is required to provide, making it easy for you to compare loans when shopping. The Loan Estimate does not indicate an approval or denial of your application, and is also subject to changes.
12. LTV – LOAN-TO-VALUE
Loan-to-Value is one assessment of lending risk that lenders use. It compares the size of your loan to the home’s value. Another way to look at it is the opposite percentage of your down payment – for example, if you put 10% down, you’re borrowing 90% of the home’s value, so your LTV is 90%. From a lender’s point of view, higher LTVs are considered higher risk loans while lower LTVs are considered lower risk loans.
13. MIP – MORTGAGE INSURANCE PREMIUM
Mortgage Insurance Premium or MIP is paid by homeowners who take out FHA loans. FHA-backed lenders use MIPs to protect themselves against higher risk borrowers, since FHA loans come with lower down payments and lower credit scores. This insurance protects lenders from incurring a loss in case the homeowner is unable to make their monthly payments.
14. PITI – PRINCIPAL, INTEREST, TAXES, INSURANCE
PITI is an acronym for the four components of your mortgage payment: mortgage principal, mortgage interest, your property taxes, and insurance: both homeowners’ insurance and mortgage insurance premiums, if applicable. PITI represents a borrower’s total monthly payment for housing and helps both the buyer and lender determine mortgage affordability. Some calculators and estimates will only provide the principal and interest payment, not giving you a full picture of what you will be paying for a home. Be sure to consider PITI when shopping for a home – a good rule of thumb is for your PITI amount not to exceed 28% of your gross monthly income.
15. PMI – PRIVATE MORTGAGE INSURANCE
Private mortgage insurance is mortgage insurance you may be required to pay on a conventional loan if your down payment is less than 20 percent of your purchase price. You can contact your lender once you’ve reached 20 percent equity in your home to remove the PMI from your mortgage payments.
16. USDA – UNITED STATES DEPARTMENT OF AGRICULTURE
The United States Department of Agriculture is a federal agency that implements policies and regulations surrounding U.S. farming, forestry, ranching, food quality and nutrition. Included in the USDA’s tasks is rural development and rural housing. The USDA provides financing for purchasing or refinancing rural homes through FHA. You can learn more at www.usda.gov.
17. VOD – VERIFICATION OF DEPOSIT
A Verification of Deposit is a document provided by a bank to verify funds in an individual’s account, such as their checking or savings. The VOD will include information about the account including the status, balance and history. Your lender uses this document to determine your eligibility for a loan and the funds you have available.
18. VOE – VERIFICATION OF EMPLOYMENT
When you provide your employment status and history on your loan application, your lender will need to verify that the information you have given is accurate and current. Your lender will typically verify your job details and history with your employer via phone or email. A VOE is a simple yet important part of the mortgage process, as your lender needs to ensure you can hold a job long-term for consistent income to pay back your home loan.
19. VA – U.S. DEPARTMENT OF VETERANS AFFAIRS
VA loans are a mortgage option for Servicemembers, Veterans and eligible surviving spouses. These loans allow eligible individuals to buy, build or repair a home with no money down in most cases. VA guarantees a portion of the loan which allows lenders to offer more attractive terms than other types of loans.
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