Common Mortgage Terms Explained | Mortgage Terms | Home Loan Explained

Common Mortgage terms explained.

When buying a home in Boise you may be asking yourself how much can I afford or borrow? This will depend on a few different factors, mainly your income and debt ratios as well as loan to value and credit history. Below, we will discuss these common mortgage terms to further your understanding of the mortgage process.

Debt Ratios Terms:

DTI (Debt to Income Ratio)

This term stands for your Debt to Income ratio represented as a percentage. Your debt to income ratio will be a determining factor on how much you can borrow or if you can even qualify for a home loan. The two types of Debt to Income are Front End DTI and Back End DTI.

Front End DTI

This ratio is calculated by dividing your monthly housing expenses (Principle Interest Taxes & Insurance or PITI) by your Gross monthly income. Example: If your monthly housing payment PITI) comes out to be $2,000 and your Gross Monthly Income is $10,000 your Front End DTI is 20%($2000 PITI ÷ $10,000 monthly income).

Back End DTI

This ratio is similar to the Front End DTI except it also factors in your non-housing-related fixed expenses such as car payments and credit card payments. The ratio is calculated by adding your monthly housing expenses (PITI) and your fixed expenses, then dividing them by your gross monthly income. Example: If you pay $2,000 (PITI) for your housing and have a car payment of $500 and a credit card payment of $50 per month. You would add 2000+500+50= $2500 total expenses. Then divide that by your gross monthly income of $10,000. Your Back End DTI would be 25%.

Note: Normally your non-housing fixed expenses are items that show up on your credit report and will be factored into your Back End DTI. These ratios typically have a limit of 35/50 which means that your Front End DTI max is 35% and your Back End DTI is 50% of your gross monthly income. These limits will vary slightly depending on the type of loan you are looking for.

PITI

This term stands for the Principle Loan amount plus the interest on the loan and the taxes and insurance.

LTV

This is the Loan to Value ratio. LTV is calculated by dividing the loan amount by the value of the property on which the loan is made. For example, if you have a loan for $100,000 on house that is valued at $200,000 the LTV would be 50%. Most mortgage products have max LTV limit in the qualifying guidelines. These limits will vary based on the type of loan you are looking for.

Fico Score

This is the term that represents your credit score from each of the three credit bureaus. The range for your FICO score is from 350 to 800 and usually the minimum FICO score for obtaining a loan is in the range of 620.

All of the above terms will affect your ability to qualify for a mortgage and will play into answering the question, “How much can I afford?” Since the guidelines for each of these ratios will vary based on the type of loan, it is best to speak with a qualified local lender to find out how much you can borrow. If you are interested in finding out more about obtaining financing for a home in Boise and the Treasure Valley.