When you’re thinking about buying a house and applying for a mortgage, there are plenty of terms that might leave you feeling confused. To help you through the process, we’ve compiled a list of commonly used terms in an easy-to-understand format.
Cash Reserves: The money someone keeps on hand to meet short-term and emergency funding needs. Cash reserves are useful when money is needed right away for unexpected payments or a large expenses.
Co-signer: Someone who is added to the mortgage application and other loan documents guaranteeing responsibility for the loan, but who doesn’t get any rights to the property. A co-signer must have stable income, a low debt-to-income ratio and great credit.
Credit Utilization Rate: The amount of credit you are currently using (your credit card and loan balances) divided by the your total available credit.
Debt-to-Income Ratio (DTI): This ratio compares monthly debt payments to monthly gross income and provides the percentage of your gross monthly income that goes towards paying your monthly debt payments.
HOW TO CALCULATE
STEP 01: Add up your monthly debt payments including credit cards, loans and mortgage STEP 02: Divide your total monthly debt payment amount by your monthly gross income STEP 03: The result will yield a decimal, so multiply the result by 100 to achieve your DTI percentage
Deductions: An expense that can be subtracted from gross income in order to reduce the amount that is subject to income tax.
Down Payment: An upfront payment made in cash when getting a mortgage. Typically, this is 5-20% of the total cost of the home, but there are plenty of loans options for putting down less than 5%.
Fannie Mae: More formally known as the Federal National Mortgage Association, Fannie Mae is a United States government-sponsored entity which typically buys loans from lenders of all sizes in an effort to make mortgages more affordable and available to low- and middle-income buyers.
FICO Score: A type of credit score created by the Fair Isaac Corporation. Lenders use a borrower's FICO score along with other details on a credit report in determining whether to provide borrower a mortgage. FICO scores take into account various factors in five areas to determine creditworthiness: payment history, current level of indebtedness, types of credit used, length of credit history and new credit accounts.
Freddie Mac: More formally known as the Federal Home Loan Mortgage Corporation, Freddie Mac allows for mortgages to be bundled together and sold as investments on the secondary mortgage market. This bundling and selling allows more people to obtain mortgages because the lenders don’t have to hold the loans on their balance sheet, thus freeing up their capital to re-lend and make additional loans.
Loan-to-Value Ratio (LTV): The ratio of the loan amount to the value of the home. This is used by lenders to determine the amount necessary for a down payment and whether the lender will extend credit to a borrower. Typically, a loan with a high LTV ratio may require the borrower to purchase Private Mortgage Insurance (PMI) to offset risk to the lender.
Mortgage Insurance Premium (MIP): Specific to an FHA loan, this is required as an upfront cost and as an annual premium for borrowers putting less than 20% down.
Private Mortgage Insurance (PMI): The extra monthly insurance that lenders require from most homebuyers who put less than 20% down. Typically, PMI will cost 0.5 percent to 1 percent of the loan over the course of the year.
THE URSINI TEAM AT COMPASS
We're not your typical real estate agents. As former city dwellers, we appreciate the qualities that make city lifestyle so unique, from the convenience of walking to your favorite restaurant or corner store to the vast and diverse cultural and entertainment activities. But we’ve also experienced the challenges and frustrations that are motivating you to seek change. During our transition from the city to the suburbs, we had the same thoughts, concerns and questions, prompting us to create a better way to navigate the suburban home search process for others.
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The Ursini Team is a team of real estate brokers affiliated with Compass. Compass is a licensed real estate broker and abides by equal housing opportunity laws. All material presented herein is intended for informational purposes only. Information is compiled from sources deemed reliable but is subject to errors, omissions, changes in price, condition, sale, or withdrawal without notice. No statement is made as to accuracy of any description. All measurements and square footages are approximate. This is not intended to solicit property already listed. Nothing herein shall be construed as legal, accounting or other professional advice outside the realm of real estate brokerage.
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