There is certainly a lot of mortgage jargon that’s hard to understand on the surface. But if you’re in the process of buying a home, knowing these terms will help you navigate the buying journey. Learn some of the most commonly used mortgage acronyms you’ll see when purchasing a home.
5 Mortgage Acronyms You’ll See in the Home-Buying Process
If you’re purchasing a home, you will likely come across various mortgage acronyms that are both unfamiliar and intimidating. While the various jargon used in the mortgage industry can be discouraging, it doesn’t have to be. Today we’re going to discuss five common mortgage acronyms you should know.
The first acronym on our list stands for principal, interest, taxes, and insurance. The principal refers to the amount you’re borrowing that will be paid back according to the loan terms. Interest is the charge you will receive for taking out the loan.
Taxes are something that everyone must pay and are levied by your local government. This tax is then used to provide local residents with a variety of services. Insurance is the policy that homeowners pay to protect against most risks that a property may experience.
The next acronym on the list is LTV, which stands for the loan-to-value ratio. This is an important factor that a lender considers when deciding whether to finance you. Essentially, LTV looks at the relationship between the loan amount you’re requesting and the home’s value.
No lender will provide funds to a borrower if the home isn’t worth the amount requested. This is why appraisals are such a vital part of the home-buying process.
The DTI will be one of the most significant focus areas as a borrower. DTI stands for debt-to-income ratio, and it’s an essential part of landing a pre-approval.
To determine your eligibility, lenders will want to compare your outstanding debt to the amount of income you’re bringing.
With that said, it’s essential to work on reducing your debt-to-income if you haven’t already because this will determine how much of a mortgage you can even afford. But if your DTI is too high, you may not meet the basic qualifications to get pre-approved.
Next on our list is PMI. This stands for private mortgage insurance, and whether you have this will depend on one thing: your downpayment.
Private mortgage insurance is required to be included with your loan if the lender must fund more than 80% of the home’s value. By adding PMI, lenders can somewhat protect themselves in the event the borrower defaults.
If your loan comes with PMI, it will be included in your monthly payment. If you want to lower your monthly payment and avoid PMI, aim to save at least 20% for your downpayment.
FHA stands for Federal Housing Administration. This is a government agency that issues mortgages made by private lenders.
If you obtain an FHA loan, you will have FHA mortgage insurance similar to private mortgage insurance with a conventional loan. This insurance protects lenders against loss as they are taking on less risk. This also enables FHA to be a little more flexible when issuing loans.
There are a lot of acronyms that you will encounter during your home buying journey. While some of these terms can be intimidating for homebuyers unfamiliar with the process, most of these acronyms are easy to understand, and knowing them will help you along the process.