Mortgage Acronyms – OMG!
Completing the mortgage process can be a daunting experience, especially for first time home buyers. Banks seem to use an entirely different language than the rest of us. Chances are you are already familiar with some common banking acronyms – DDA, ATM, ACH. We’ve described some others below that you may not be familiar with, and hopefully this will help you on your home buying journey.
PDTI
This is your personal debt to income ratio, or the ratio of your monthly debt payments (PITI/mortgage/rent, credit cards, student loans, auto loans, etc.) to your monthly income before taxes. While the preferred ratio varies by lender, it is common for banks to want a PDTI of 36% or less. This leaves plenty of room for income taxes and living expenses (utilities, clothing, food, etc.) each month.
PITI
PITI stands for principal, interest, (property) taxes, and (property) insurance. When calculating your PDTI, this is often what banks will consider to be your monthly mortgage payment because property taxes and insurance are both required and often escrowed. Banks will often prefer that your PITI is 28% or less of your monthly income before taxes, but check with your lender for their threshold.
LTV
This is your loan to value ratio, or the ratio of your mortgage amount to the value of your home as determined by a bank-ordered appraisal. A lower LTV is considered more favorable, and typically a LTV of 80% or less is required to avoid private mortgage insurance (PMI – see below). Also keep in mind that any other loans secured with your home, such as a home equity loan or home equity line of credit, would be included in the loan amount of your LTV calculation.
PMI
Private mortgage insurance is an insurance used with conventional mortgage loans to protect the bank in case you stop making payments. Essentially, you are paying the premium on an insurance policy the bank has on you. This is often required if you do not have at least 20% of the purchase price as a down payment, and the premium is usually lumped in with your monthly mortgage (PITI) payment until your LTV falls below 80%. In some cases this will be removed automatically, but sometimes you have to request it in writing and provide an additional proof of valuation, such as a new appraisal, for it to be removed. Ask your lender for additional details.
APR
The calculation of APR, or the annual percentage rate, on your loan is meant to provide the borrower with a truer cost of obtaining a mortgage loan, and a way to compare lenders with a more “apples to apples” approach. By law, the APR must be disclosed to a borrower within 3 days of formally applying for a mortgage. It will include non-interest charges and fees that are included in your mortgage loan, like appraisal and documentation fees.
FICO
The FICO score is a common tool used by lenders to determine if an individual qualifies for a loan. Your FICO score is dependent on your debt payment history, amounts owed, the length of your credit history, your mix of credit, and what new credit you have. FICO scores range from 300 to 850, and higher scores are more favorable. Score requirements vary by lender, and in many cases having a better score may mean a lower interest rate and lower payments. Your lender will obtain and should provide you with a copy of your score during the mortgage underwriting process.
Are you ready to begin the home buying process? Are you looking for guidance as you begin the process of mortgage pre-approval? The experienced real estate experts at The Bouma Group would be happy to answer your questions and walk you through the whole process. Give us a call today at 734-761-3060 or email info@bouma.com!