Mortgage Terminology Glossary Amortization
FHA
A loan is repaid in equal installments, calculated over
The Federal Housing Administration (FHA) is a
the term or life of the loan. In the early years, most of
United States government agency created in part by
the loan payment is applied to interest, while in the
the National Housing Act of 1934. It sets standards
latter years, most of it is applied to the principal.
for construction, underwriting, and insures loans made by banks and other private lenders for
Debt-to-Income (DTI)
home building.
A debt-to-income ratio (DTI) is one way lenders measure an individual’s ability to manage monthly
Loan Payment = Principal + Interest + Taxes +
payments and repay debts. DTI is calculated by
Insurance (PITI). May also include PMI.
dividing total recurring monthly debt by gross monthly income, and it is expressed as a percentage.
Loan-to-Value (LTV)
EXAMPLE: $3,000 monthly debt (including
A term used to express the ratio of a loan to the
new housing payment) / $7,000 gross income
value of an asset purchased. The term commonly
3,000/7,000 =.4285 = 42.85% DTI
represents the ratio of the first mortgage balance as a percentage of the total appraised value of a house
Earnest Money
and/or land.
Money paid to confirm a contract. In the case of
EXAMPLE: $350,000 loan amount / $400,000
a Mortgage Contract, it is a good-faith amount of
home value = 350,000/400,000 = .875 = 87.5% LTV
money given with the acceptance of a Purchase Agreement.
Mortgage Insurance Premium (MIP) for FHA loans Similar to Private Mortgage Insurance
Escrow
but specifically for FHA originated loans. MIP will
The portion of a mortgage payment that is
include an upfront fee at closing & a premium on
designated to pay for property taxes and hazard
monthly payment.
insurance. It is an amount “over and above” the principal and interest portion of a mortgage
Points / “paying points”
payment. Since this can fluctuate, the mortgage
One point is equal to 1% of the loan amount, or
servicing company will make the insurance and tax
$1,000 for every $100,000. Points are fees paid
payments on your behalf. What you owe is shared on
to the lender at closing in exchange for a reduced
your mortgage statement.
interest rate, which will lower your monthly payment.
HOME BUYER’S GUIDE
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