It seems like every business has it's own language and the mortgage industry is no different – but for those buying homes, it can be confusing!! Especially if there are words that may mean something slightly different! Here is a quick list of terms that lenders tend to use and what they mean:
Escrow – this is usually used when lenders are talking about the money collected with your monthly payment. An escrow account is the part of your payment that is kept by the lender to pay your taxes, homeowners insurance and mortgage insurance. When those bills come due, the lender will pay them for you out of your escrow account. Typically once a year, they will analyze your account and make sure they are collecting enough money for the next year. Sometimes a lender may "escrow" an amount due to pay a bill after closing. For example, in Minnesota you cannot paint outside in the winter (at least not usually!), so at closing the title company will collect money to pay the bill and once the work is done, the bill is paid with the money collected in an escrow account. That escrow account is different from the one your mortgage company holds to pay your taxes and insurance.
DTI – you may hear your loan officer mention this. DTI is debt to income ratio. Your loan officer will calculate this based on your income and your debt, including the new house payment. The lower your DTI, the better. Ideally you want to keep your total debt to income ratio under41-43%. In some cases, you can go higher, but every file is different!
PMI or MI- private mortgage insurance – this is not insurance to protect you, but allows you to purchase a home with less than 20% down using conventional financing. The MI is paid to a separate company that protects the lender against losses when homeowners default on their mortgage.
APR – annual percentage rate – this is a way to calculate the cost of a mortgage. It takes into consideration the interest rate, closing costs and any mortgage insurance.
LTV – loan to value – this is the ratio of the mortgage to the home value (purchase price or appraised value, whichever is less). For example, an $80,000 mortgage on a home valued at $100,00 would have an LTV of 80%.
PITI – this is your monthly payment – principal, interest, taxes and insurance.
When you are talking to your loan officer, if you do not understand what they are talking about, make sure you stop them. Loan officers don't always think about the words they are using, so ask questions. If I am meeting with a first time homebuyer, there are times that I can tell they do not understand what I am talking about – or maybe it's why I need certain documentation. Always feel free to ask questions! I want you to understand what you are going through! The mortgage process can be difficult at times, we want to make sure you understand what we are talking about!