The mortgage process in the Sooner State, just like in most places in America, can be tricky, complicated, and overwhelming. Even if your prospective lender tries to oversimplify things for you, you are still going to encounter lots of numbers and jargons that can make things more confusing.
Before you shop for Grand Lake, Oklahoma, homes, understand these basic mortgage-related acronyms to compare loans more effectively.
LTV
Short for loan-to-value, the LTV ratio is the percentage of the property price you can borrow. All lenders have LTV requirements, which are the minimum amounts they are willing to loan to borrowers of different credit scores.
For example, a mortgage with an LTV ratio of 90% means you need to put down 10% of the property’s appraised value.
LTV is an important metric to gauge whether you can afford to buy a house. Since the Great Recession, lenders have been extra careful in financing property purchases. You will hard-pressed to find a lender who is willing to gamble offering a loan with 100% LTV.
DTI
This term stands for debt-to-income ratio. DTI calculates the percentage of your gross income is going toward your projected monthly mortgage payment.
There are two kinds of DTI ratio: the front-end and the back-end. The former refers to the total housing expenses while the latter includes all other debts payable monthly. Between the two, the back-end DTI ratio matters more, for it will illustrate who much of your income will be left after settling your monthly debts.
As a general rule, the lower your DTI ratio, the better. The maximum back-end DTI ratio most lenders want to see, though, is 43%. Anything higher than that will likely spell mortgage application denial.
PMI
Shorthand for private mortgage insurance, this type of coverage protects your lender, not you, against a financial loss in case you stop paying your loan. It applies only when your down payment is less than 20% of the property’s price. Although it is subject to automatic cancellation once your LTV ratio touches 78%, there are strategies to ditch it much sooner.
APR
Also known as the annual percentage rate, this depicts the actual cost of borrowing, represented annually. It takes into account the mortgage rate as well as the closing costs you have to pay up front.
A loan’s APR is generally higher than the mortgage rate, for it includes the other fees that must be at closing. There are instances, though, where the ARP is lower. This scenario is possible when an adjustable-rate mortgage (or ARM, a bonus acronym) is in question. The advertised APR can be less than the interest rate when a lender tries to project the lowest possible interest rate adjustment.
While the mortgage rate of an ARM is more likely to rise and go down come adjustment time, a lender can choose to highlight the best-case scenario to attract and intrigue potential customers.
There are more interesting mortgage-related terms than this short blog can cover, but understand the said acronyms should make you feel confident to talk and negotiate with your lender. If you are not familiar with something you can encounter during your loan application, ask questions because confusion can lead to a bad decision and years of regret.
