Like in so many other industries and areas of life, there seems to be an acronym for nearly every mortgage term. If you aren’t well versed in them, it can sometimes feel like your loan representative is speaking another language. If your representative says something you don’t understand, be sure to ask questions! Knowing what’s going on is crucial to a smooth and error-free process. To help you gain a better understanding, Cliffco Mortgage Bankers put together a breakdown of the most commonly used mortgage acronyms.
FHA (Federal Housing Administration): The Department of Housing and Urban Development (HUD) defines the FHA as a government body that provides mortgage insurance on loans made by approved lenders throughout the United States and its territories. FHA insures mortgages on single family and multifamily homes including manufactured homes and hospitals. FHA mortgage insurance provides lenders with protection against losses as the result of homeowners defaulting on their mortgage loans. The lenders bear less risk because FHA will pay a claim to the lender in the event of a homeowner’s default.
ECOA (Equal Credit Opportunity Act): This federal law provides that financial institutions and other firms engaged in the extension of credit do not discriminate against potential borrowers based on race, color, religion, national origin, age, sex, marital status or receipt of income from public assistance programs.
RESPA (Real Estate Settlement Procedures Act): According to RESPA, lenders must provide certain disclosures (Good Faith Estimate, Mortgage Servicing Disclosure Statement, HUD-1 Settlement Statement, etc.) at specific times during the loan process.
GFE (Good Faith Estimate): The GFE is a form lenders are required by law to provide you with within three days of receiving your application. It includes the estimated costs you’ll have to pay for the mortgage and outlines basic information about the loan so you can compare offers, understand all costs associated with the loan, and make an educated decision about which lender to go with.
TIL (Truth in Lending Act): This act protects you against inaccurate and unfair credit billing. The TIL is a statement a lender should provide you with along with your GFE that includes the information you need to compare mortgage offers.
APR (Annual Percentage Rate): The Consumer Financial Protection Bureau explains that an annual percentage rate (APR) is a broader measure of the cost of borrowing money than an interest rate. The APR reflects not only the interest rate but also the points, mortgage broker fees, and other charges that you have to pay to get the loan. For that reason, your APR is usually higher than your interest rate.
ARM (Adjustable-Rate Mortgage): An ARM is a mortgage whose rate of interest is adjusted periodically to reflect market conditions. Generally, the interest rate on an ARM is fixed for a period of three to 10 years before it starts to adjust.
HELOC (Home Equity Line of Credit): A HELOC is a line of credit drawn against the equity in your home.
DTI (Debt-to-Income ratio):Most lenders require your debt-to-income ratio in order to measure your ability to manage the payments you make every month to repay the money you have borrowed. You can calculate your debt-to-income ratio by adding up all your monthly debt payments and dividing them by your gross monthly income (the amount you earn before taxes are deducted).
LOX (Letter of Explanation): You may be required to submit a LOX, or a short letter of clarification, if you have negative information on your credit history or loan application, such as your rental history, explanation of late payments, or why your income changed.
LTV (Loan-to-Value ratio): The LTV is the difference between the amount of the mortgage and the market value of your home. You can determine LTV by dividing the loan amount by the purchase or market price. Most lenders require an LTV of 80 percent but offer special programs for borrowers who need a higher LTV.
MIP (Mortgage Insurance Premium) or PMI (Private Mortgage Insurance): The acronyms MIP or PMI are both associated with the fee included in your monthly payment to insure lenders who fund loans with an LTV greater than 80 percent.
PITI (Principal, Interest, Taxes and Insurance): PITI is a single mortgage payment that includes principal, interest, taxes, and insurance.
If you have any more questions about any of these acronyms, don’t hesitate to contact us at Cliffco Mortgage Bankers today! We are happy to help you!