Loan officers seem to have their own language. Somewhere between Klingon and Watusi is found a litany of acronyms which seem to fly from the mouths of mortgage professionals. Naturally, in an effort not to appear uneducated, many of those who hear the terms simply refuse to stop the onslaught and ask, “what’s that mean?”
Far beyond the scope of this short article you should find a detailed education on each of these three common acronyms. Since you are on the metro between M and D try this short read until you have the time to spend hours on the subject. Just call this the “Fast Pitch” version.
Annual Percentage Rate (APR) is likely one of the most misunderstood, and possibly abused, of all three of these terms. Most people understand the interest rate. Usually expressed in a whole number followed by a percentage point as in seven point three seven five (7.375) or some reasonable facsimile thereof the interest rate is the percentage of repayment of the loan. This rate is expressed in an annual rate just to make APR more confusing. Yet another item beyond the scope of this short article is how mortgage interest is front-loaded so make sure you subscribe.
The APR includes not only the annual interest rate as expressed as interest rate but also the total of any closing costs which occurred solely because the borrower was getting a home mortgage expressed in an annualized format over the life of the loan. See what I mean? So if you borrow $100,000 and your closing costs associated with the loan are $3,000 that is a total of three percent. Now divide that three percent by the number of years in the loan, let us say 30, and you have 0.1 (zero point one). Now add that to your mortgage interest rate, we said 7.375 and you get an APR of 7.475.
Sounds a little more understandable, right? Be careful. Just because you comprehend this very elementary example of APR does not preclude you from being deceived by different terms, hidden costs, discount points and more. As indicated earlier make sure to subscribe and return often for more, make that less, confusion.
Loan to Value (LTV) is very important these days. It was always a more important factor in determining loan risk but many lenders quit caring so much about the accuracy of these figures when the easy money was flying out of the banks and investor’s pockets just a few short years ago. There is really only one method of determining value today which is acceptable to a lender issuing a loan on a real property. For both purchase loans and home loan refinances the key is the appraised value.
In spite of many people’s hopes the sales price can often be higher than the appraised value. In this case the lender will not extend or approve the loan until the sales price and the loan amount are in line with each other. The LTV is strictly an expression of the loan amount compared to the appraised value. For example if the loan amount is $80,000 and the appraised amount is $100,000 that would be an 80% LTV.
No, you cannot pay the rest out of pocket if the appraisal comes in too low. No, you may not pay a higher down payment if the appraised amount is lower than the sales price. You can pay cash but not borrow – at least not from a conventional mortgage lender.
To get the LTV divide the appraisal amount by the loan amount after down payment.
Debt to Income is more of a variable ratio on most loans. The DTI can be offset by higher credit scores, better employment history or even the amount of assets available to the borrower. As a general rule a housing ratio of 31% and a total ratio of 43% is the optimal maximum debt to income ratio. In the event the applicant has a higher credit score and a large amount of reserve liquid assets the automated underwriting engine may approve the loan with a much higher total debt ratio. Even recently loans are AU approved with total debt ratios as high as 55% or more.
Hopefully you have a little better understanding of these three secret mortgage language terms or at least enough to go Googling.
Photo Credit: http://www.flickr.com/photos/myjedilightsaber/3808659603/
popular home loan program that offers rural homeowners significant benefits — chief among them is the absence of a down payment. USDA loans help low- and middle-income buyers purchase homes in qualified rural areas. Consumers can use these loans to build, renovate or even relocate a home.
Basics
Yes it is true that rates are still at an all time low. But does that mean you need to refinance? Well, that is not always the case. What?? A loan officer telling you it may not make sense for you to refinance? Yes and No. When I am talking with someone about refinancing, I look at many aspects. Obviously we are going to talk about credit so we can assess your current situation. This post is not about Credit though.
Right now.
