This is a glossary of some of the more common, and most important mortgage terms. This list will help to familiarize you with some of the terms you should know to find the best mortgage program for your needs.
PITI – Principal, interest, taxes, insurance. The total monthly payment if fully amortized. PITI also used to calculate reserve requirements for asset documentation (i.e. Full doc loan may have reserve req’t of 2 months PITI – if PITI is $3,000, minimum liquid assets required to qualify is $6,000).
LTV – Loan to Value – Percentage of a homes value owed on a mortgage. (i.e. If loan amount is $200,000 and home is worth $400,000, LTV = 50%. LTV of 100% would mean the mortgage amount is equal to the value of the property). Most mortgages have an upper limit on the LTV. LTV generally refers to one loan, even if there are multiple liens on a property. For example, with a first mortgage amount of $200,000, a second mortgage amount of $100,000, and a property value of $600,000 – First mortgage LTV = 33%, Second mortgage LTV = 17%.
CLTV – Combined Loan to Value – This is the total percentage of a home’s value owed on all mortgages combined. For example, first mortgage amount of $200,000, second mortgage amount of $100,000, and property value of $600,000 is 50% CLTV. If applying for more than one mortgage, there will be an upper CLTV limit on the combined loan amounts as well as an upper LTV limit on each individual loan amount.
DTI – Debt to Income Ratio – Represented as a percentage, this is the ratio between debts and income. There are two types of DTI:
- Front End DTI (Also called “upper” or “top” DTI) – This is the ratio between monthly housing expenses and monthly gross income. Formula for Front-End DTI is: PITI / Gross Monthly Income
- Back End DTI (Also called “lower” or “bottom” DTI) – This is the ratio between total monthly fixed expenses and monthly gross income. Formula for Back-End DTI is: (PITI + Non-housing-related Fixed Expenses) / Gross Monthly Income.
As a rule of thumb, its important to note that any expense appearing on a credit report will be factored into DTI calculations and any expense not appearing on a credit report will not be factored into DTI calculations. For instance, most utility bills do not show up on credit reports, and, as such, are not factored into DTI calculations.Upper limits on DTI generally fall around 35/50, or 35% max front-end DTI and 50% max back-end DTI. In other words, no more than 35% of gross income can go to fixed housing expenses each month, and no more than 50% of gross income can go toward all fixed expenses (housing included) each month.
VOE – Verification of Employment – This is a document completed by the borrower’s employer and submitted to the lender for the purposes of confirming employment history if required, and income, if required, as shown on the 1003.
1003 – Uniform Residential Loan Application – Pronounced Ten – oh – three. Four-page Mortgage application.
ARM – Adjustable Rate Mortgage – Any mortgage with an adjustable rate feature. Note: This includes any mortgage with a rate that may adjust at any time during the loan period. For example, a traditional 30-year fixed rate mortgage is not an ARM, however, a 5 year fixed is, because after the first five years, the rate begins to adjust for the remaining term of the loan.
Amortization – The characteristic of a loan that describes whether or not it will pay off and, if so, in how long. For example, 30 year amortization means the loan will reach a zero balance after 30 years (360 months). 10 year amortization means the loan will reach a zero balance after 10 years (120 months).
Negative Amortization – The characteristic describing a loan with a principal balance that increases over time. Generally, this type of loan involves a payment less than the actual amount of interest due. The difference between interest paid and interest due is added to the principal balance each month, resulting in negative amortization. A negatively amortized loan will never reach a zero-balance. Note that there is always a limit to the amount of negative amortization that can occur before the borrower is forced to refinance, make interest only payments, or make principal and interest payments.
Doc Type (see Doc Type articles) – Describes the level of documentation required to be provided to the lender as a qualification requirement for a given loan.
Interest-Only – A type of amortization in which the principal balance of the loan neither increases nor decreases. Each month, the payment is equal to the interest owed and no principal payment is made. With interest-only amortization, the principal balance on the loan will never change. Note that there is a limit on the interest only period. When such limit is reached, the borrower will have to refinance or make principal and interest payments.
Impounds – Also known as “escrows,” this is, usually, an optional loan feature that allows the borrower to opt to pay property taxes and insurance monthly, included in the mortage payment. The money that is paid is held in an escrow account until property taxes or homeowner’s insurance is due, at which time the money is paid out. Usually, if the borrower opts for impounds, the interest rate will be reduced about 1/8%. See Impound article for more information.
SIVA – Stated Income Verified Assets
SISA – Stated Income Stated Assets
NINA – No Income, No Assets
Underwriting – A stage in the loan approval process during which a bank or lender representative reviews all loan documents and makes a decision to approve the loan, decline it, or approve the loan subject to certain conditions.
Conditions / Conditional Approval – Common in brokered mortgage transactions, a conditional approval is issued when the underwriter feels fit to issue an approval, subject to certain conditions. Conditions may include things like submission of more income and/or asset documentation, submission of more legible copy of drivers’ license or social security card. For the purpose of expediting the approval process, a loan may be submitted without certain required documentation, in which case, assuming everything else is acceptable, a conditional approval will be issued subject to the submission of the missing required documents. This allows an underwriter to review a loan application without delay when the borrower may have trouble getting certain required documents submitted in a timely fashion.
Floor – When refering to interest rates, this is the lowest rate available on a selected loan program from a given lender. This almost always comes at significant cost to the borrower in the form of points.
Par (Par Rate) – The interst rate at which discount points are closest to 0. It’s important to note that although discount points may be near 0, in most cases the borrower will still incur costs.
YSP (Yield Spread Premium) – Also known as rebate. YSP is found in brokered mortgage transactions in which a rate higher than par is requested. In exchange for the higher interest rate, a lender will pay a rebate to the broker. It is the broker’s choice what to do with that rebate, however, it must be disclosed on the final closing documents. Also, if the broker is also a direct lender, there is no requirement to disclose YSP on final closing documents.
Points – Commonly confused term – a point is nothing more than a percentage. Many people tend to think of points as the same thing as closing costs; in fact, they are not the same thing. 1 Point is equal to 1% of the loan amount.(See article about points, basis points, etc…)
Basis Point – This is a method for pricing loans on the secondary market – most borrowers will never hear this term. 1 basis point = 1% of the loan amount. 100 basis pts is a par rate. Less than 100 is a cost, more than 100 is a rebate.