Here’s an understatement: The financial industry is full of confusing terms.
The mortgage world, especially, is saturated with head-scratching words and acronyms. What’s an LTV, for example? You’d be forgiven if your first thought went to some sort of off-road vehicle.
If you’re buying a home for the first time, a lot of terms will be thrown at you. Familiarizing yourself with them now will save you some head-scratching later.
The following is the first of two in a series of mortgage terms that SELCO Mortgage Loan Officers are often asked to explain. This first part explains a few terms that are relevant to the loan-approval process.
The loan-to-value (LTV) ratio is a calculation lenders use to determine the risk factor before approving a mortgage loan or home equity line of credit (HELOC). An LTV ratio takes into account the appraised value of the home and the loan amount. Bottom line, the lower the LTV, the lower the risk to the lender, which likely will result in better overall terms (rates and fees).
Debt-to-income (DTI) ratio is another way to determine your borrowing risk. The DTI ratio measures whether you have sufficient income to cover your monthly debt payments and still have money left over for other expenses. Similar to LTV, a low DTI ratio demonstrates a good balance between gross monthly income and monthly debt payments. Keeping your DTI under 40% shows a lender that you have wiggle room in your budget to weather an unexpected financial storm.
Appraisal vs. inspection
A home appraisal determines a house’s worth while pointing out any obvious issues that would impact the sale of the home. An inspection is a deep dive into the overall functionality of a home. It’s important to note that an appraisal doesn’t take the place of an inspection. An appraisal is generally required for a mortgage, whereas an inspection isn’t required but is highly recommended when buying a home.
All right, who’s ready for a pop quiz? It might actually be a good idea to test your knowledge occasionally. Familiarizing yourself with these common mortgage terms will give you a leg up when it’s “go time” to buy a home. If any trip you up, remember SELCO Mortgage representatives are on hand to help any way they can.
Next Up: Demystifying Mortgage Terms, Part II