Unless you’re a real estate pro, many common mortgage terms may be lost on you, which can make buying a home or applying for a refinance frustrating. That’s especially true if you find yourself saying, “LOL what?” every time your lender uses common mortgage terminology like 1003, LTV, and DTI. Don’t worry, though, you’re not alone in your confusion. According to the lenders I spoke with, these are the terms their borrowers have the most trouble with.
Debt to Income Ratio (DTI)
One term that’s important — yet often misunderstood — in the mortgage application process is debt-to-income ratio, according to Keosha Burns, executive director and the senior advisor for community and affordable lending at JPMorgan Chase. “A person’s debt-to-income ratio (DTI) reflects their total debt due each month against their monthly gross income,” or your income before taxes are taken out, she says. “In addition to your credit score, lenders use DTI to help determine how much a prospective borrower may qualify for,” Burns says that most loan programs require between a 40 to 50 percent DTI.
The Deed vs. the Note
These two important mortgage documents are needed to complete every mortgage transaction. “The Deed is signed by the people who will own the property (the buyers), and it states if there is a mortgage or not,” explains Ericka York, senior loan officer with Fairway Independent Mortgage. The Note, on the other hand, lays out the terms of the mortgage (and actually has nothing to do with the deed). “It is the promise to pay back the loan amount and the terms of said loan,” York says.
Loan-to-Value (LTV) Ratio
You may have heard the term loan-to-value (or LTV) tossed around when discussing your loan amount. An LTV ratio is a way for lenders to turn the difference between your current loan amount and the value of your property into a percentage. “For example, a loan amount of $150,000 for a home valued at $200,000 would have an LTV ratio of 75 percent,” explains Burns.
The Annual Percentage Rate (APR) vs. the Interest Rate
While APR and interest rates sound similar (they both deal with a rate, after all) the figures they represent are quite different, according to York. “The interest rate is what the principal balance of the loan is paid back at,” she says. It’s how your monthly mortgage payment is determined. An annual percentage rate, on the other hand, takes into account the interest paid over the course of the loan, plus closing costs and other fees. Then, over time, your APR shows you what your principal loan is truly costing you if you keep the loan with its original terms, York says. If you’re shopping lenders, comparing the APR can be a good way to see where you’ll get the better deal.
York says you should think of your 1003, which is your loan application form, as the story of you. “Think about when an underwriter who has never met you looks at your file for the first time; 1003 tells the story of job, credit, and residence history,” she says. “It is the very start, and most important, part of a loan.” Without that detailed application information, things could pop up later that could slow down your mortgage application — or halt the process altogether.
Private Mortgage Insurance (PMI)
Unlike homeowners insurance, not every mortgage applicant will have to deal with Private Mortgage Insurance. That’s because PMI is only required on loans where borrowers put less than 20 percent down. “It is a monthly charge that protects the lender in case of loan default,” York says.