Okay, now at the outset, I will fully disclose my understanding that in every industry there are terms and phrases used that make little or no sense to anyone outside of the industry.  Only mechanics and their ilk actually understand, for instance, what a carburetor is or what it does.  Doctors, nurses and medical sorts banter terms like “flexible sigmoidoscopy” or “visceral leishmaniasis” without batting an eye while the rest of us are looking remarkably confused.  But it is my firm belief that loan officers have a language all their own, and am the first one to say that I hate it.

 Mortgage Terms Are Confusing

Mortgage-ese consists of phrases like “With an LTV of 90, you’ll need PMI, which will increase your P&I—we’ll want to see a back-end of 36 or lower.  Oh, and you’ll see a point four increase in the APR, but we’ll go over that when we review the TIL and compare the info from the GFE.”

 Understanding Mortgage Terms

It’s not exactly tough to see Mortgage-ese and why people hate it when you read that, is it?  So for the rest of us, here’s a primer of terms that you’re going to want to know when you get a mortgage loan:

LTV:       The loan-to-value ratio means how much your home is worth versus how much you owe on it.  If you owe $80k on a home appraised at $100k you have an LTV of 80%. The lower the LTV, the better.

APR:      Your loan officer will say something like “this is the actual interest rate you’ll pay on your loan.”   (To the rest of us, that means “blah, blah, blah.”)   Here’s what it comes down to:  your lender has to show you the APR (annual percentage rate) because it’s an easy way to compare lenders.  If you’re comparison shopping between two lenders, borrowing the same amount at the same interest rate and the same term, the one who shows you the higher APR is charging you more in closing costs.  You’ll probably want to go with the other guy.

TIL:         The truth-in-lending (TIL) form is one of the most terrifying documents you’ll ever see.  Why?  Because it tells you how much you’re going to pay over the life of your loan.   The first time you see that you’re going to pay $400,000 in payments over the next 30 years on a home you’re buying for $200,000 you’ll want to lie down.  But it’s also going to tell you what the APR is on your loan and some other pertinent information…so buck up and read it before you sign.

GFE:       There’s nothing really having to do with faith in the Good Faith Estimate (GFE); in fact, it’s a document required because faith in one’s fellow man when it comes to mortgage lending has largely disappeared, replaced with the cold, hard facts.  On this spreadsheet on steroids, you’ll see what you’re borrowing and every single fee you’re going to pay for the loan you’re getting.  Again, it may be eye-boggling as well as mind-boggling, but the info is important, so pay attention.  This isn’t something you’re going to want to gloss over.  And make sure you receive an actual Good Faith Estimate as opposed to just a fee sheet.

Debt Ratios:       How much you pay out every month versus how much you take in every month is precisely what debt ratios are all about.  On the front end, your loan officer takes the monthly payment on the loan you’re applying for and divides it by your gross monthly income.  Your housing payment shouldn’t be more than about a quarter of your total income.  On the back end, the loan officer will take your monthly debt payments (credit cards, student loans, etc.), add them to your new loan payment and, again, divide it by your gross monthly income.  And  bigger isn’t better;  if more than about 35% of your gross monthly  income is going to pay debt, you may not be able to get a loan.

So do you understand Mortgage-ese now?   Well, that’s okay–neither to the rest of us.  But there’s always hope.  (see RateWindow® — See What The Loan Officer Sees!)