Mortgage Terms and Definitions
Below is a MRR and PLR article in category Finance -> subcategory Mortgage.
Key Mortgage Terms and Definitions
Navigating the mortgage process can be challenging if you're not familiar with the terminology. To simplify things, here’s a guide to essential terms and their definitions.
Key Terms
- Broker: An independent professional who manages the entire home loan process on your behalf.
- Lender: The financial institution that provides and funds your home loan.
- Processor: The person who prepares your loan for underwriting by verifying your income, ensuring an appraisal is performed, and opening title and escrow.
- Escrow: An independent entity that works with the title company to manage payments and ensure all existing liens are satisfied and funds are distributed correctly.
- Title: Confirms that both borrower and lender have a clear title to the property, ensuring existing liens are resolved and removed.
- Underwriters: Employed by the lender, these professionals decide whether to approve or deny your loan based on established guidelines.
- Automated Underwriting: A computerized system that quickly approves a loan, typically within minutes.
Mortgage Options
- ARM (Adjustable Rate Mortgage): Offers a fixed rate for a set period before becoming adjustable, with rates that fluctuate based on market conditions. ARMs often start with lower payments and are ideal for those with damaged credit or short-term ownership plans.
Financial Ratios and Scores
- DTI (Debt to Income Ratio): Your total monthly debt compared to your gross monthly income. For example, $2,500 in monthly debts with a $5,000 income gives a DTI of 50%. Higher DTIs represent higher risk for lenders.
- Equity: The portion of the property you truly own. It’s calculated by subtracting the owed amount from the appraised value of the property.
- FICO Scores: Most lenders use this scoring system to evaluate borrowers. Scores, generated by Experian, TransUnion, and Equifax, consider factors like payment history, credit inquiries, and total debt. Lower scores indicate higher lending risks.
- LTV (Loan to Value Ratio): A ratio comparing the loan amount to the appraised property value. For instance, a $75,000 loan on a $100,000 home gives a 75% LTV, with 25% equity. Higher LTVs pose greater risks to lenders.
- Stated Income: Declaring income on the application without independent verification. This is beneficial for self-employed individuals or those with non-traditional income streams.
Conclusion
Obtaining a mortgage can be daunting, but a solid understanding of these key terms can ease the complexity. Being familiar with the lingo makes the process less stressful and more manageable.
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