The disruptions brought on by the coronavirus pandemic have caused many mortgage lenders to be more cautious. Many are raising the acceptable credit score threshold, putting loans out of reach for a large number of prospective borrowers. Find out where to look for help.
Summary: Mortgages can be complex products, and if you are not familiar with them, they can seem confusing. If you plan to take out a mortgage, it’s a good idea to expand your mortgage vocabulary, which we will help you do in this article.
Getting a mortgage is not something you do every day. If you’re lucky, you may only go through the process a few times in your life. One aspect of getting a mortgage that makes many uncomfortable is the strange terminology associated with mortgage finance. Do you really have to be a Bill Gates to understand all this high finance terminology?
Sit back and relax, kids. We’re going to decode and demystify all this alien lingo for you.
Once you have given all your income and asset documents to your loan officer, he or she will put a process in motion to get your loan approved. This is called
This is the review and analysis of all the components of your loan application to be sure it meets the requirements of the investor who will ultimately buy the loan. The underwriter will review your
This is an acronym for Fair, Isaac and Co., the company that developed this three-digit number to indicate to a potential lender how much risk a potential borrower might present to a lender. The FICO score ranges from 300 to 850. Most people have three FICO scores, one from each of the three major credit bureaus (Experian, Equifax and TransUnion).
The underwriter will consider the “mid score,” which is the one between the high and the low. Where there are two or more applicants, the lowest of the mid scores will be the one used for approval. A conventional loan requires a minimum FICO of 620. FHA is a little more tolerant, and will allow a score as low as 580.
This is the Debt To Income Ratio. The underwriter adds up the applicant’s monthly income (before taxes). Then, they add up the total house payment (including taxes, insurance and mortgage insurance, if any) and any debt payments lasting more than ten months.
This figure is then divided by the monthly income to arrive at the DTI. A borrower with $6,000 in gross monthly income, a $2,000 total house payment and $400 in debt payments would have a DTI of 40% ($2,000+$400/$6,000=40%). The DTI can go as high as 45% for most loan programs. Next, the underwriter looks at the
This is the Loan To Value ratio. LTV is the loan amount divided by the home’s value. A $500,000 home with a loan of $400,000 would have an LTV of 80% ($400,000/$500,000=80%). If an applicant needs a loan larger than 80% of the home’s value, they will typically have to pay
This stands for Private Mortgage Insurance. Lenders consider that a down payment smaller than 20% of the home’s value presents too much risk by itself, so they limit their risk by requiring PMI. The borrower typically pays this monthly.
The cost of PMI is determined by a combination of the LTV and the borrower’s FICO score (remember those?). A buyer with a 740 FICO score and a 10% down payment can expect to pay about $250 per month in addition to the mortgage payment. Lenders will allow borrowers to drop PMI once they can demonstrate that the loan is 80% of the home’s value or less.
There is another type of mortgage insurance, called Mutual Mortgage Insurance (MMI). This is the insurance for FHA loans, which are insured by the Department of Housing and Urban Development (HUD). FHA insurance must stay with the loan until it is paid off, so the only way to drop it is to refinance into a conventional loan.
Once the underwriter has reviewed the loan he or she will issue a loan approval—but there are almost always some
to be satisfied before the lender parts with the money. There are two kinds of conditions: PTD (Prior To Documents) and PTF (Prior To Funding). PTD conditions are those that have to be signed off before the lender will prepare the final loan documents.
PTD conditions may involve requests for updated pay stubs, bank statements or letters of explanation for items on the credit report. In most cases, PTD conditions are routine and easy to deal with. PTF conditions are those that have to be satisfied before the lender can wire the money to the escrow company. PTF conditions tend to be simple matters that the escrow company handles as part of its regular process.
The current regulations for lending involve more extensive (and frequent) disclosures to borrowers so that there are no unpleasant surprises on closing day. The first of these disclosures is the
- This is the Loan Estimate, and contains all the figures associated with the loan at the time it is originated. The LE will show the loan amount, interest rate, payment and all the closing costs. Although this document is an estimate, the lender has only a small tolerance in some of the costs—and no tolerance at all on others. A borrower will receive an initial LE at the very beginning of the process and another one at the time that the interest rate is locked. Immediately before sending loan documents for the borrower’s signature, the lender will send out a final
- The Closing Disclosure shows the final figures before the close of escrow. The borrower must have three days to review this five-page document before signing the final loan documents. If you receive the CD on a Friday, you will be able to sign loan documents on Tuesday. If a borrower is refinancing a personal residence, the law also requires a
This is a three-day “cooling-off” period during which a homeowner can decide to back out of the transaction. If loan documents are signed on a Monday, the loan can fund no sooner than the following Friday (rescission would be Tuesday-Thursday). Sundays and national holidays are not part of the rescission period.
That wasn’t too painful was it? And don’t worry—there won’t be a pop quiz. But now you know most of the top-secret language involved in the home loan process.
Ready to Apply For a Mortgage?
Do you have questions about home loans? Are you ready to apply for a mortgage to buy a home? If so, Sammamish Mortgage can help. We are a local mortgage company from Bellevue, Washington serving the entire state, as well as Oregon, Idaho, and Colorado. We offer many mortgage programs to buyers all over the Pacific Northwest and have been doing so since 1992. Contact us today with any questions you have about mortgages.