If you’re new to the home buying scene, then you’re sure to be new to the mortgage market. Mortgages, to no one’s surprise, are your way of financing and paying for your home, but mortgages also come with a great deal of lingo that can be not only confusing but downright frustrating.
The first time you walk into a bank or approach a lender, you’ll likely be hit with lots of industry lingo and terms that you’ve otherwise never heard before unless you’ve dealt with loans in the past. Things such as FICO, LTV, DTI, and appraisal will likely pop up in casual conversation, so it stands to reason that you would be better off to know what some of these basic terms are before you apply for a loan. Here’s our guide to learning basic mortgage terminology.
FICO or Credit
Your lender will likely start by running your credit score also known as your FICO score. FICO, much like saying “Kleenex” or “Coke” to describe any tissue or soda respectively, is simply a name brand of credit scores but it happens to be one of the most often used and most reliable on the market. FICO stands for the Fair Isaac Corporation. The Fair Isaac Corporation is a major data analytics company that specializes primarily in consumer credit.
Your credit score is an indication of your creditworthiness and takes into account your lifetime credit and calculates it into a score ranging from 300 to 850. Naturally, the lower the credit score, the less creditworthy an individual is. The higher the credit score, most likely allows for a larger qualification from a lender, and the lower your interest rate can be. In general, there are some ways to improve your credit score once you understand how individual parts are weighted. (We’ve got several blog posts specifically on credit scores.)
LTV and DTI
LTV or loan-to-value percentage and DTI or debt-to-income ratio are both important factors in helping your lender determine your interest rate and affordability of the loan they’re planning on giving you. They both measure parts of your financial situation differently but work together in determining how much your lender can loan you, at what interest rate, and whether or not you’ll pay private mortgage insurance (PMI).
LTV deals primarily with how much money you’re putting down against what the home’s value is. For example, if you put $60,000 down on a $300,000 home, then your LTV would be 80% which is a rather significant number. Since the market crash of 2008, lenders require homebuyers with an LTV of more than 80% to pay private mortgage insurance in the event that they default on their loan. Meeting or exceeding an LTV of 80% eliminates the need for PMI, therefore, saving you money each month.
DTI uses your current income and debt scenario to determine how affordable the home you’re buying is. DTI is used by taking your monthly income and dividing your current debts to yield a percentage that indicates how affordable your new home will be. For example, if your monthly income is $4,000 and your debts total $10,000, then your DTI is 40%. In general, 43% or lower DTI is required for most mortgages, but the lower your DTI the better.
Get Professional Help
No matter what your DTI, LTV, or FICO score is, it helps to get the opinion of a professional. The experts at Tidewater Mortgage Services, Inc. can help guide you through the complicated loan process and help you understand how each one of these scores, ratios, and percentages factor into your homebuying experience!