Demystifying Mortgage Terms, Part I
To put it mildly: the financial industry is full of confusing terms.
The mortgage world, in particular, is saturated with puzzles words and acronyms. What is an LTV, for example? You’d be forgiven if your first thought was some sort of all-terrain vehicle.
If you are buying a house for the first time, many conditions will be imposed on you. Getting familiar with them now will save you from scratching your head later.
the loan-to-value ratio (LTV) is a calculation that lenders use to determine the risk factor before approving a mortgage or home equity line of credit (HELOC).
An LTV ratio takes into account the appraised value of the home and the loan amount. Bottom line, the lower the LTV, the lower the risk to the lender, which will likely result in better terms and conditions (rates and fees).
The debt-to-income ratio (DTI) is another way to determine your borrowing risk. the
DTI report whether you have enough income to cover your monthly debt payments and whether you still have money left over for other expenses.
Similar to LTV, a low DTI ratio demonstrates a good balance between gross monthly income and monthly debt payments.
Keeping your DTI below 40% shows a lender that you have wiggle room in your budget to weather an unexpected financial storm.
ASSESSMENT VS. INSPECTION
A home appraisal determines the value of a home while pointing out any obvious issues that would impact the sale of the home.
A inspection is a deep dive into the overall functionality of a home. It is important to note that an assessment does not replace an inspection.
An appraisal is generally required for a mortgage loan, while an inspection is not required but is highly recommended when buying a home.
Alright, who’s up for a pop quiz? In fact, it may be a good idea to test your knowledge from time to time. Familiarizing yourself with these mortgage terms will give you a head start when it’s time to buy a home.
If you come across other confusing terms in your search, be aware that SELCO Mortgage Representatives are here to help in any way they can.