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May 1, 2020

Homebuying Lingo You Need to Know

Category: Mortgage 101

The homebuying industry is full of acronyms. It can be hard to keep up, so we’re here to help! Learn the lingo before going through the homebuying process so you sound like a pro. Here are some of the most important acronyms you need to know:

APR (Annual Percentage Rate): The APR is simply the interest rate you pay on a loan annually. Basically, it is the cost of borrowing the money from a financial institution.

ARM (Adjustable Rate Mortgage): An ARM is a mortgage with an interest that can increase or decrease depending on various factors. Adjustable-rate mortgages often begin with low interest rates, even below market rate sometimes, but the rate does increase or decrease based off a standard financial index set by the Federal Reserve or the London Interbank Offered Rate (LIBOR).

CD (Closing Disclosure): The Closing Disclosure is a 5-page form provided to you by your lender usually 3 days prior to closing. The final terms and costs of your mortgage are outlined in the CD. This document is very important to review thoroughly so there are no surprises at closing.

DTI (Debt-to-Income) ratio: The debt-to-income ratio compares your monthly gross income to your monthly debt payments. Simply put, lenders look at the percentage of your monthly gross income that is paid towards your debt payments every month.

FICO (Fair Isaac Corporation): FICO is the first company to offer a credit risk model represented by a score. The credit score model FICO is still the primary method to determine your creditworthiness.

FHA (Federal Housing Administration): FHA is a government agency that sets standards for construction and underwriting. The FHA insures loans made by private lenders and banks for home building.

LE (Loan Estimate): A Loan Estimate is a 3-page document provided at the beginning of the home loan process that provides an estimate of the costs you can expect. This breakdown will include costs such as closing fees, interest rate, and your loan amount.

LOX (Letter of Explanation): This is a letter written by you to address or explain anything in your employment or financial documents that may be a cause for concern. This could include sudden or unusual activity in your credit report or bank statements.

LTV (Loan-to-Value) ratio: The LTV ratio is used to determine the risk factor for a lender taking on a loan. The LTV ratio measures the loan amount compared to the market value of the asset.

PITI (Principal, Interest, Taxes, and Insurance): This acronym represents the sum components that equal your monthly mortgage payment.

PMI (Personal Mortgage Insurance): Personal mortgage insurance is a type of insurance that you may be required to purchase if you have a conventional loan. PMI is usually required when your down payment is less than 20% of the purchase price. PMI is used to protect the lender in the event you stop making your mortgage payments.

POC (Paid Outside of Closing): Any fee or payment that will need to be paid outside of the normal fees due at the time of closing a loan. Appraisal fees, for example, are due at the time of service and would need to be paid before closing.

Do you have any follow up questions to the above acronyms or would you like our loan officers to walk you through the homebuying process? Contact one of our loan officers today!