Common Mortgage Acronyms Every Gen Z Homebuyers Should Know
The number of Generation Z homebuyers are expected to grow in the next couple of years. As the youngest credit-eligible generation planning to buy a home, you should be aware of the industry-specific acronyms that you’ll encounter which may appear to be very technical. It’s critical that you know and understand the common mortgage acronyms by heart to avoid costly mistakes and help you get the best deal.
Mortgage acronyms that are all about payments
When you shop and compare lenders, you’ll start hearing a lot of mortgage acronyms that, most of the time, you might find confusing. Keep in mind that many of these acronyms have something to do with you and the lender.
ARM – Adjustable-Rate Mortgage is a type of mortgage with an interest rate that’s initially locked for a certain period. ARMs initially start with a low-interest rate then after the pre-determined length of time, they will be adjusted based on the agreed-upon index. Getting an ARM loan is not advisable if you don’t have plans of relocating within the time that you’re paying low-interest rates.
FRM – Fixed-Rate Mortgage loan, on the other hand, is a type of mortgage with an interest rate that does not change in the whole course of the loan. You’ll likely predict the amount of your monthly payments until you finish off the loan. FRM is more popular than ARM and is advantageous when people are able to secure a mortgage when interest rates are significantly low.
DTI – Debt-to-Income ratio is the percentage of your income that goes to your other debts before taxes. Most lenders require that you have at most a 43% DTI ratio to determine that you can repay the loan you’ll take. DTI may affect the loan amount you’ll borrow and/or the interest the lender will charge. Determine your DTI by adding all your debt payments then divide it by your gross income.
FICO® score – Commonly known as your credit score. FICO® stands for Fair Isaac Corporation. Generally, lenders will give you a better offer if your credit score is in the mid-to-high 700s or above because it gives them more confidence that you’ll likely be a responsible borrower if you have that score. Credit scores are derived from the information you have in your credit report. Although some lenders still consider borrowers with a credit score around 580, you’ll get better offers if you have an exceptional credit score. You can use a tool like myFICO to get an estimate of your credit score.
PITI – The monthly mortgage you’ll pay will cover the Principal, Interest, Taxes, and Insurance. These are the basic elements of your monthly mortgage payment. As a mortgage borrower, PITI lets you know where your payments go that’s why it’s important that you thoroughly understand the fees indicated in your monthly mortgage.
PMI – Stands for Private Mortgage Insurance. Lenders collect this fee as part of your monthly payments if you make a down payment on a conventional loan that’s lower than 20 percent. Lenders require this fee to protect them in case you fall behind your mortgage payments. You’ll have to pay PMI until you can build enough home equity to request the lender to stop paying it.
MIP – As a first-time homebuyer, a lender will require you to have an MIP or Mortgage Insurance Premium if an FHA Loan secures your mortgage. Like PMI, lenders require an MIP fee to protect them in case you fall behind your mortgage payments.
FHA Loan – Considered to be the world’s largest mortgage insurer, FHA Loan or the Federal Housing Administration Loan is a popular option for low-income but credit-worthy first-time homebuyers. Through an FHA loan, it’s possible to purchase a home with a 3.5 percent down payment. If you’re eligible for an FHA loan, lenders will likely consider your mortgage application even if you don’t meet their minimum requirements.
VA Loans – This is a loan option you may greatly consider if you’re an active servicemember in the military. The VA or the U.S. Department of Veterans Affairs makes it possible for you to buy a home without having to pay for a down payment. To obtain a VA-backed home loan, you first need to secure a Certificate of Eligibility then meet the VA’s and your chosen lender’s standards and requirements.
The mortgage acronyms are just the tip of the iceberg
As you go along your homebuying journey, you’ll also come across many varying industry-specific jargons that you’ll hear from loan advisors. Learning all the mortgage acronyms and other terminologies makes you an informed buyer and it will help you ask lenders smart questions. Take time to ask and make sure to thoroughly understand the jargons on how they will affect your mortgage application.
Because buying your first home is a big investment and it often involves great decisions, you may want to consult a professional loan advisor for you to better understand your mortgage options.