For some of us, going through a mortgage process can sound like being in a doctor’s office, with a lot of terms being tossed around that only the experts truly understand. “This ARM needs a DTI right away, and somebody get me a RESPA in here!” Fortunately this extremely informative article from Bankrate provides definitions for all the mortgage acronyms you might need to know.
If you’ve ever shopped for a mortgage, you’ve probably been overwhelmed by an alphabet soup of acronyms that seem to be designed to confuse the borrower at every turn.
The lingo is complex, but the definitions aren’t hard to understand. Here are the basics.
LE: Loan Estimate
The Loan Estimate, or LE, is a document that provides details about a mortgage that the borrower has applied for. The lender is required to mail or deliver it within 3 business days of the loan application. The LE describes the interest rate on the mortgage, shows whether the rate is fixed or adjustable, summarizes the estimated loan costs, calculates how much money the borrower will need to take to the closing table and contains loan-comparison calculations that encourage borrowers to apply at more than 1 lender and compare loan offers.
CD: Closing Disclosure
This document itemizes the loan costs. The CD is designed to make it fairly easy to compare with the LE, so borrowers can see if the lender changed any terms of the mortgage.
DTI: Debt-To-Income Ratio
A debt-to-income ratio, or DTI, is how a lender determines how much a borrower can afford to pay every month. By dividing the borrower’s monthly liabilities by monthly income before taxes, the lender arrives at a percentage. To qualify for the mortgage, borrowers usually need to fall below certain thresholds. Typically, lenders don’t want the monthly house payment to exceed 28% of income, and don’t want all debt payments (house, auto, credit cards, student loan) to exceed 36% of income. Thresholds can vary by lender.
LTV: Loan-To-Value
An LTV, or loan-to-value, is one of the key ratios that lenders use to assess the risk of a loan. The ratio is the mortgage divided by the purchase price or appraised value of the property. When a property has multiple mortgages, lenders use a combined loan-to-value ratio, or CLTV. Borrowers with an LTV or CLTV of less than 80% often get lower interest rates because lenders view such loans as less risky.
RESPA: Real Estate Settlement Procedures Act
The Real Estate Settlement Procedures Act, or RESPA, and the Truth in Lending Act, or TILA, are the 2 main pieces of federal legislation that govern mortgage lending to consumers. Among other things, RESPA requires lenders to provide borrowers with a Loan Estimate within 3 days of applying for a loan, as well as the Closing Disclosure 3 days before closing.
ARM: Adjustable-Rate Mortgage
An adjustable-rate mortgage, or ARM, is a home loan in which the interest rate can change based on movement in an agreed-upon index, such as the London Interbank Offered Rate, or Libor. Usually, ARMs start with lower rates than fixed loans. But there’s always the risk that the borrower can eventually end up paying more than if he or she had secured a fixed rate.
