We want to start off by building a base of terms that will be used in this site and terms that are commonly used in the Real Estate and Mortgage world. You will see these terms throughout the book and will surely hear them when working with your Realtor and loan agent.
We want you to be confident walking into those meetings and not play catch up when all these terms and acronyms are being thrown around. These are the most basic and MUST KNOW terms when you start your home loan search or else your entire conversation with your agent will sound like they are speaking a foreign language. So, let’s get started…
LTV (Loan to Value Ratio)
Simply put, LTV is the loan amount (Mortgage) divided by the current market value of the home.
Example: $100,000 (Mortgage) / $200,000 (Current Market Value) = 50% LTV
DTI (Debt-to-Income Ratio)
This is when you take ALL your monthly debt (Mortgage Payment, car payments, minimum credit card bills, student loan payments) divided it by your current monthly gross income. When calculating your DTI, make sure all your figures are monthly.
Here is a scenario to break it down:
+ Credit Card $200
+ New Mortgage payment $2,200
Total Debt: $2,500
Gross Income = $6,000
$2,500 / $6,000 = 41.66%
Your DTI ratio is 41.66%. Most lenders require 50% or lower DTI to qualify so yay! You now qualify for a home loan!
Conventional Loans (Conforming)
Loans that conform to Fannie Mae and Freddie Mac guidelines. Fannie Mae and Freddie Mac guidelines are EXTREMELY INTENSIVE.
Basically, they are looking to back loans with good credit (640 minimum), low LTV (80% max), low DTI (50% max including all debt), and there are max loan limits and that differs from county to county. If you do not fall into these guidelines, you will have to get an FHA, VA, or Unconventional loan.
A loan is considered high balance when it is over a certain limit. That limit is different with every county. To find the conventional loan limit in your county, check out the link below. Interest rates on High Balance Loans are a tad bit higher conventional loan.
California Loan Limits
Read the latest loan limits here: California Loan Limits
Loan amounts higher than the Fannie and Freddie conventional limits and above the county High Balance limits are considered Jumbo loans.
Example: Los Angeles county high balance loan limit is 679,650. A jumbo loan amount would be anything greater than that.
Is a monthly premium charged to the borrower. Mortgage insurance is usually reserved for FHA loans and loans above 80% LTV.
Example: If you want to buy a home but only have 5% down payment, you will likely be charged the following:
1. One time up front mortgage insurance premium (usually a percentage of the loan)
2. Monthly mortgage insurance premium (usually a percentage of the loan divided by 12 months and added to your monthly payment)
FHA (Federal Housing Administration)
Is a government agency that insures mortgages with high LTV and lower credit scores. If a borrower defaults on an FHA loan, the banks are protected. FHA loans require mortgage insurance but offer a lower interest rate than a conventional loan.
Allows people to buy a home with a low-down payment, low credit score, and higher DTI ratios. Lowest interest rate. Lenders will offer up to 100% Financing with no monthly mortgage insurance. There is a one-time up-front mortgage insurance premium but Veterans with 10% disability or more may get their upfront fees waived.
Upfront Mortgage Insurance Premium plus a Monthly Mortgage Insurance Premium. Overall, FHA loans allow more people to qualify but at a slightly higher cost. 0-2.4% up-front premium charge (one time).
Is your credit score provided by the 3 credit reporting agencies: Experian, Transunion and Equifax. Of the 3 scores, the bank will use the middle score to qualify your loan application.
Example: Experian score = 685, Equifax score = 700, and Transunion score = 702.
Your middle Fico score would be 700. The higher your credit score, the better the interest rate you will get.
VA (Veterans Administration)
Loans offered to those who served in the military or are currently active. Like FHA, the VA insures mortgages in case the borrower defaults. VA loans also offer lower rates than conventional loans.
Unconventional loans not offered by retail banks/lenders. Here are a few examples of non-conventional loans we offer:
- Bank Statement loan (Business or Personal) – Loan based on borrower’s monthly deposits in their business or personal bank accounts. A lender will not require tax returns to calculate income. Perfect for business owners or 1099 employees who do not report all of their income on their tax returns.
- Investor Loan – Loan given to borrowers who have previously owned a home and have 25% down payment plus 4 months of payment reserves.
- Asset Program – Loan based on a large savings or retirement account even if you have no income. For example, a retired person who has a $1,000,000 in a 401K but has no income can still qualify for a substantial loan.
Also known as an impound account. The lender will create an account and collect your home’s property taxes and homeowner’s insurance monthly. If you don’t create an escrow account, you will be responsible to pay your taxes in a lump sum twice a year. If your property taxes are $10,000 a year, you will need to write a $5,000 check twice a year. So be sure to plan accordingly.
We always recommend having the escrow account because its just easier to pay a little bit monthly than be hit with 2 giant bills twice a year.
Here is an example of how an escrow account would work into one simple monthly payment:
$500K Mortgage @ 4.5% = $2,533 Monthly
Property Taxes for one year = $6,250 / 12 = $520 Monthly
Homeowners Insurance for one year = $800 / 12 = $66 Monthly
One total monthly payment: $3,119
An easy way to think of seasoning is like marinating meat. Like how you season the chicken or ribs? Sometimes lenders have seasoning requirements on money in a savings account which means the money has to be “seasoned” for 3 months before you can use it to qualify. Just like marinating your meat, you must marinate your cash sometimes.
An appraisal is ordered after the loan is approved which is usually within one week of submitting the loan. An appraiser will come out to the property and provide a report of the homes value which will be used to calculate your LTV. (Remember LTV? It’s the ratio of your mortgage loan balance divided by your income.) The appraiser will consider the condition of the property AND the selling price of comparable homes in the area. The cost of the appraisal is around $500. It could be more based on the type of property.
© 2018 Vantage Home Loans Mortgage. All rights reserved. Loans are subject to credit and property approval. Other restrictions and conditions may apply. Programs and guidelines are subject to change without notice. Rates are subject to change daily. Vantage Realty Inc., NMLS #1394651 BRE License #01984669. corporate office located at 145 S. Fairfax Ave. #200 Los Angeles, CA 90036.