Mortgage 101

Whether you're a first-time homebuyer or you've done multiple refinances, mortgage terms and numbers can be extremely confusing. Here are the most common talking points explained in detail so that you're better informed next time around.

CREDIT

All lenders have credit tiers and your rate (as well as possible PMI) is directly affected by your score. These tiers generally are every 20 points, so for instance 680-699 represents one tier and 700-719 represents another tier. The higher your score, the better the tier, and, in turn, a better rate.

Private Mortgage Insurance (PMI)

PMI is required on conventional loans when the down payment is less than 20%. The amount of PMI is based on three main factors: credit, down payment, and debt-to-income ratio. PMI will fall off once your loan-to-value ratio hits 78% with the lender or once you refinance your initial mortgage and you have 20% or more equity.

Loan to Value (LTV)

You will hear this referenced when you are talking about how much equity you currently have in your home. When refinancing, your LTV can have a direct effect on your rate. The better the LTV, the better the rate. It's extremely easy to calculate, just take the current amount you owe on your mortgage and divide that by the estimated value of your home.

Debt to Income (DTI)

This is a term you’re guaranteed to hear when buying a home. Your DTI is calculated by adding up all of your monthly liabilities and then dividing that number by your monthly income (before taxes). Generally for conventional loans, you can go up to 50% and on Jumbo loans, you can go up to 43%.

Example: You have a $300 a month car payment and $100 a month in credit card payments. You're buying a home for $600k and putting 20% down. Your rate on the loan amount of $480k is 6% so your principal and interest payment is $2877. Your monthly property taxes are $625, home insurance is $100 and let's say you have an HOA of $200. All of these numbers add up to $4,202 which means to qualify and stay under the 50% threshold, you would need to make $8404 a month before taxes.

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