If you are new to getting a mortgage you may want to take some time to learn some terms like Debt Ratio and Loan to Value - LTV - before you adventure down the path of applying for a mortgage. There is a lot to know and it can seem overwhelming - some advice - take your time and ask a lot of questions.
Knowing something about the terms your loan officer will use, as well as your real estate agent will take you a long way to making sure you get the best mortgage for you, as well as the best home purchase contract.
Mortgage Terms All First Time Home Buyers Should Know
Debt Ratio - your debt ratio is simply a comparison of your monthly institutional debt to your monthly income. Institutional debt can be thought of as credit card payments, car loan payments, mortgage payment, student loan payments etc. Things like electric bills, cell phone bills, cable bills are not considered when you calculate your debt ratio. Your monthly income is basically arrived at by taking your annual income and divide it by 12 months. See more information on Debt Ratio and Income.
LTV - Loan to Value. This represents the loan amount you are borrowing divided by the appraised value or sales price of the house you want to purchase multiplied by 100%. For example: you are borrowing 180,000 on a house that is worth 200,000. This will have a LTV of 90%. The higher LTV, the more closely the underwriter will look at your financial qualifications to get the loan
Credit Scores - a number between 300-850 that is calculated by the credit bureaus or repositories by analyzing your past credit and payment history. This score predicts the likelihood of your payment history in the future. It helps the lender identify how much risk the lender is taking when they approve a loan. The higher the score the more likely you are going to pay your bills as you agreed to pay them when you got the credit account.
Credit Repository - there are three major credit repositories that keep track of your credit. All of your creditors, or at least most of them, report your credit payment history to these repositories. Not all creditors report to all the repositories. This is important when you are applying for a mortgage as they will look at each repository to make sure they get the whole picture. Other types of creditors like a credit card company or auto dealer might only look at one or two of your credit report and scores because their credit underwriting decision making process is different from a mortgage company.
Pre Qualified - an informal conversation with a mortgage loan officer regarding your financial situation when you are looking to apply for a home loan. Typically, you'll discuss what you can purchase in general, but not specifically. To get more specific about what loan products you qualify for, you will need to be pre approved.
Pre Approved - a formal look at your credit report, income, assets, monthly bills and in some cases a complete underwriting of your file for a full approval. A pre approval will result in a letter that you can give to your real estate agent when you are ready to write an offer on a house that you want to buy.
Underwriter - This is the person who works for the company that is going to loan you the money you are looking to borrow or extend you credit. If you are renting it could just be the property manager. But for a mortgage or a car loan, the underwriter goes through your application with a fine tooth comb to see if you can pay back the loan and are credit worthy enough to get the loan. Underwriters have very specific guidelines that they work with to match your loan situation to their loan programs. We say: underwriters are our friends - we give them what they want, you get your loan or mortgage.
Mortgage and Mortgage Note - the legal documents that you sign that hold you responsible for the money you borrow on a house. You will sign these at your 'closing' or 'signing' once your loan has been approved by the underwriter.
Appraisal - a report completed by an independent inspector called an appraiser that determines the value of the property that you are looking to get a mortgage for. Almost always, you will have to get an appraisal. The cost on an appraisal starts at around $300 and up. Typically, you will need to pay for the appraisal up front either in an application fee, or directly to the appraiser. Appraisers are not on staff at your mortgage company. They are independent folks who have a very tough job and need to be paid no matter whether you get your loan or not.
There are many, many more terms. These are some of the basics. Learn more terms by continuing to read through GetPreQualified's extensive library about mortgage programs, real estate and credit.
