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The 3 Most Common Mortgage Acronyms You Need to Know

As of June 2020, the median price of a house in the U.S. was about $284,600, as reported by the National Association of Realtors (NAR). With about 1.3 million Americans earning below the minimum wage, per the U.S. Bureau of Labor Statistics (BLS), paying for a house out of pocket can be difficult. This is where mortgage lenders come in handy. It is worth noting that mortgage debt is one of the main sources of consumer debt in the U.S. Currently, the total value of mortgage debt in the U.S. stands at around $9.6 trillion, as reported by Experian. With this in mind, become familiar with different mortgage acronyms when applying for a mortgage.

Here’s a look at three of the most common mortgage acronyms.

PMI

PMI stands for Private Mortgage Insurance (PMI), and it covers a mortgage lender against the risk of loan default. Typically, a mortgage lender will require you to carry PMI if your down payment on the house was 20% or less. You may also need this insurance policy if you refinance your conventional loan with less than 20% of the home value in equity, according to an article published by Forbes Media. You can pay for Private Mortgage Insurance in three ways:

  • Monthly premiums added to your mortgage payments
  • A one-time upfront payment at closing of the mortgage
  • One upfront payment followed by monthly premiums added to your mortgage

Take note that the Private Mortgage Insurance (PMI) protects the lender and not you, meaning the bank can still repossess your house if you fail to repay the mortgage.

DTI

DTI, or Debt-to-Income, is the ratio of the amount you pay on your mortgage loan every month to the size of your monthly income. Usually, lenders use this ratio to determine your financial strength before approving a mortgage. This is because some homeowners fail to pay their mortgages on time due to financial disability, prompting the lender to foreclose the property. For example, in 2010 alone, the foreclosure rate in the U.S. was 2.23%, although it has decreased since, as reported by Statista. To avoid such cases, the Debt-to-Income (DTI) ratio enables the lender to only approve a mortgage that you can comfortably afford. For instance, the lender will not approve a mortgage loan if your gross monthly income is considerably less than the monthly repayments, says the Consumer Financial Protection Bureau. Since the lender uses your gross monthly income to calculate the DTI ratio, ensure you use your net income for accuracy purposes.

LTV

Indicated as a ratio, LTV or Loan-to-Value (LTV), is the loan amount divided by the lender-assessed value of your home. Lenders also use this ratio to determine whether you qualify for a mortgage. If the LTV ratio is significant, say higher than 80%, most lenders will consider you as high-risk and may increase your monthly repayment amounts or require you to purchase mortgage insurance. Additionally, some lenders may only finance you if you have a good credit history, as reported by the Corporate Finance Institute (CFI). On the other hand, you can access lower mortgage rates if you have a lower Loan-to-Value ratio, which means that the risk is low. In other words, a lower Loan-to-Value ratio means that you’re borrowing a smaller amount and will mostly pay for the property out of pocket.

Conclusion

When applying for a mortgage, defining mortgage acronyms is vital. Do you have additional questions about mortgage acronyms? At Fidelity Mortgage Lenders, we’re here to help. To get started, contact us or give us a call at (800) 752-9533.

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