Key Terms in Mortgage
DTI, LTV, PITI(A), HOA, PMI, MIP, and the Many Other Terms You Will Encounter

DTI stands for Debt to Income Ratio. 

 

This is arguably one of the most important numbers in mortgage lending.  Your DTI is essentially a percentage based on comparing your gross (pre-tax) monthly income to your monthly debt payments.  There are two types of DTI, the front-end DTI and back-end DTI. 

 

The front-end DTI is only your potential mortgage payment compared to your gross monthly income (including taxes, insurance, and any HOA dues if applicable), and your back-end DTI is the total mortgage payment combined with any outstanding debt obligations you must pay each month such as car, credit card, alimony, or student loan payments. 

 

For example, if your gross monthly income is $5,000 a month, and your potential mortgage payment included taxes and insurance is $1,000, your front-end DTI stands at 25%.  If you also have a $500 car payment and $1,000 in student loan and credit card minimum payments adding up to $1,500 additional, your total monthly obligations amount to $2,500, and your back-end DTI will be 50%. 

 

Your DTI ratios determine your eligibility for certain loan programs, as the lender will want to ensure your mortgage payment does not consume too much of your monthly income.  Certain payments can be excluded from your DTI, so be sure to consult with a loan officer before drawing conclusions.

LTV stands for Loan to Value Ratio, another extremely important number that will also play a large role in determining your eligibility for certain programs. 

 

Your LTV is simply a comparison of your total loan amount to the fair market value of the property.  If the transaction is a purchase, the LTV is the ratio comparing the total loan amount to the lesser of the sales price or appraised value. 

 

For example, if you plan to purchase a home for $500,000 and use a mortgage loan totaling $450,000, at first glance your LTV is 90% based on the sales price alone.  However, if the appraisal values the property at $480,000, your LTV is now 93.75%.  In the fortunate scenario that your home appraises above your purchase price at, let's say, $530,000, your new LTV would not rise to 84.9%.  This is due to purchase LTV always being based on the lesser of the sales price or appraised value. 

 

When it comes to a refinance, usually the LTV is based solely on the appraised value of the property.  However, if you purchased the property being refinanced within 6 months of your refinance attempt, be sure to ask your loan officer if you will be able to use the appraised value rather than the sale price, as certain loans have "seasoning" requirements for recently purchased properties. 

 

When it comes to loan approval, the lower your LTV, the better.  By bringing more of your own funds to the table and lowering your LTV, you show the lender that you have more skin in the game, and present less of a default risk.

CLTV stands for Combined Loan to Value Ratio. 

 

As the name suggests, this ratio is similar to LTV.  The "combined" in CLTV refers to the presence of a second mortgage of any kind.  What exactly is a second mortgage? 

 

A second mortgage is simply an additional mortgage obligation that is second to your first, primary mortgage loan in terms of priority.  You aren't limited to just a second mortgage either; technically, you can have as many mortgage loans on a property as you wish, so long as you can find a lender willing to take lower priority. 

 

Second mortgages of any kind present a large risk to the lender, as the priority order refers to how the lenders will be repaid in the event that you, the borrower, default on the mortgages.  The lender that offered the first mortgage will have their repayment prioritized, while any additional mortgages will have to wait for what remains.  This is why many lenders of second mortgages will be strict on your maximum CLTV, which is like your regular LTV, but rather than just one mortgage loan total being used to calculate the ratio, you must use the total of all mortgage loans that will be attached to the property. 

 

For example, let's say you intend to purchase a home for $500,000.  You use a regular FHA first mortgage that has an LTV of 80% (a $400,000 loan).  However, you also decide to use a down payment assistance program that provides you with a deferred-payment second mortgage of 10% LTV (a $50,000 loan).  While your first mortgage LTV would be 80%, your CLTV will be 90% due to the presence of a second mortgage.  Other common second mortgages include HELOCs and home equity loans.

PITI stands for Principal, Interest, Taxes, and Insurance. 

 

PITI(A) simply adds on one more possibility, the "A" being for any possible association dues such as an HOA payment or an association payment for a condo or townhome.  PITIA is, therefore, a way of saying your "total" mortgage payment with all related expenses included, not just your principal and interest. 

 

PITIA is an important tool in determining certain ratios such as DTI ratios.  Your PITIA is also the true number that you should use (or if you do not have one yet, do your best to estimate) when understanding how much your new housing expense will be and whether or not that number is comfortable to you.  

HOA stands for Homeowners Association. 

 

An HOA is an organization that presides over condominiums, townhomes, subdivisions, or planned unit development (PUD) that can create and enforce various rules for the upkeep, appearance, and usage of the properties within its jurisdiction. 

 

When purchasing a property within an HOA's territory, membership in that HOA is typically mandatory.  The extent to which they control these factors varies between different HOAs, with some granting much personal freedom for members and other enforcing draconian rules and regularly imposing fines on members that do not comply.  HOAs collect monthly or annual dues, and these dues go towards the upkeep of the community's appearance and amenities such as HOA member-only gyms or pools. 

 

While HOAs may restrict freedom of expression to a certain extent, the standards they set for property appearance and community upkeep may help keep property values high in your area.  If you plan on purchasing a property under the authority of an HOA, you should research that HOA's name and read any reviews left by previous or current members.

HOI stands for Homeowners Insurance. 

 

This insurance is mandatory for home buyers seeking to financing their purchase with a mortgage loan, and covers losses and damages to the property in question.  It also may cover personal belongings, furnishings, and assets within the home, as well as liabilities arising from accidents that occur within the property. 

 

Also known as "hazard insurance", HOI serves many purposes that all protect both the homeowner and the lender in the event of an unforeseen accident involving the property.  When financing a home purchase with a mortgage or obtaining a refinance, you must have an HOI policy in place that covers the full amount it would take to replace the property, which is fairly standard as far as HOI policies go. 

 

If you already have auto insurance, you may save money by bundling your HOI and auto with the same insurance agency.  You may also need additional flood insurance if the property being financed is located within a high-risk flood zone as designated by the FEMA.

PMI stands for Private Mortgage Insurance, and MIP stands for Mortgage Insurance Premium.  UFMIP stands for Up Front Mortgage Insurance Premium. 

 

All three of these are forms of mortgage insurance, which is a form of protection for the lender that allows them to lend to borrowers who cannot provide high amounts of down payment. 

 

Let's cover PMI first.  PMI is a monthly additional charge added onto your PITIA payments for all conventional loans (and some other programs as well) in which the borrower makes a down payment of less than 20%. 

 

In the event that the borrower defaults on the mortgage, the PMI policy will protect the lender from suffering large losses.  PMI is usually paid in monthly installments, and the annual total averages between 0.5% to 1.5% of the original loan amount, then divided by 12 into equal monthly installments.  PMI percentages vary based on a variety of factors, chiefly your credit history and the amount of down payment you can provide compared to your loan amount. 

 

If a mortgage loan with PMI is utilized, typically the only way to remove the PMI is either to refinance the mortgage once your LTV would be equal to or less than 80%, or to request the PMI provider to remove the charge once your home's value or remaining mortgage balance changes enough to meet the 80% LTV maximum.  Keep in mind that even if these conditions occur very quickly after using the loan, many PMI providers have rules stipulating that PMI must remain for 1 or 2 years minimum regardless of LTV. 

 

MIP, on the other hand, is the equivalent of PMI but for FHA mortgages.  Unlike PMI, MIP must be present on all FHA loans regardless of down payment amount, and if your down payment is less than 10%, it will remain for the life of the loan until its full repayment or a refinance. 

 

Annual MIP typically ranges from 0.8% to 1.05% of the loan amount.  UFMIP, Up Front Mortgage Insurance Premium, is an additional one-time charge for all FHA loans of 1.75% of the loan amount.  This charge is financed and added to the loan amount rather than being paid out of pocket, and it does not affect the LTV or your down payment requirement.  These insurance premiums are required by the FHA in order to continue allowing FHA mortgage borrowers to bring down payments as low as 3.5% to the table.

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PMI, MIP, or UFMIP are, of course, best avoided if it is within your financial capacity to contribute a high down payment while retaining enough funds for furnishing your new home, and keeping an emergency reserve.  Yet, keep in mind that mortgage insurance is not evil.  Without mortgage insurance, lenders would have far less suppliers of capital willing to lend to homebuyers who cannot put down 20% or more.  Such a barrier would shut the doors to homeownership for millions of financially capable and creditworthy Americans.  In fact, as of 2022, the average down payment for all home purchases across the nation was 12%.  For homebuyers between the ages of 22 and 40, the average down payment was 8%.  Mortgage insurance has an important role to play in granting innumerable home seekers with buying power each year.

APR stands for the Annual Percentage Rate. 

 

If you ever see car financing advertisements on billboards along a freeway, or credit card commercials on a streaming service, this is an acronym that has been displayed every time.  It is a similarly prevalent acronym in mortgage financing, and is separates itself from the interest rate by accounting for the total financing charges that you incur and including them in the rate as well.  This includes fees such as origination charges and discount points. 

 

For example, while the interest rate of a mortgage loan may be offered at 6%, once accounting for any required discount points or lender fees, the APR may be 6.875%.

ARV stands for After Repair Value. 

 

This is a term common in real estate investing in the fix & flip or fix & hold scenes. 

 

The ARV of a property is the fair market value you can expect for the property once necessary repairs and renovations have been performed to bring the property back into acceptable condition.  As the name suggests, ARV is a term commonly associated with distressed properties. 

 

It is an extremely important number when planning to acquire a property in disrepair, with both the investor and lender using this figure to ensure that the project is a profitable one.  A common rule in fix and flip projects states that the cost of purchasing the property combined with the total costs for renovation and repairs should not exceed 70% of the ARV, leaving a healthy safety margin for unforeseen expenses.

CMA stands for comparative market analysis. 

 

Quite simply put, this is a method used by many real estate industry professionals such as real estate agents to produce the best estimate of a property's value. 

 

This is performed by comparing various similar properties in the immediate vicinity of the subject property that were recently sold.  By comparing the price per square foot of these comparable properties (or "comps" as they are often referred as), one can arrive at a reasonable estimate of a property's fair market value.

Non-QM stands for Non-Qualifying Mortgage. 

 

Let's first go over what a "QM loan", or qualifying mortgage loan, entails. 

 

A QM loan is simply any mortgage loan that meets certain standards set by government-affiliated agencies that preside over the US mortgage market.  Consequently, these loans are considered less risky in the eyes of the government, and generally offer borrowers with the most competitive rates they can qualify for should they meet the strict standards set for all applicants.  QM loans must be for a duration of 30 years or less, have no features such as negative amortization (loan balance increasing over time), interest-only payments, or balloon payments (one large lump sum payment due at the end of the loan term), and any points or fees charged for the loan cannot exceed a combined total of 3%.

 

But many homeowners or home buyers in the US do not meet the strict standards of QM lending.  Whether their income history or documentation falls short of guidelines, or too many tax deductions leave them with little on-paper income to qualify, there are innumerable situations that can restrict one's access to QM financing.  Non-QM solutions allow these disadvantaged but otherwise financially-capable borrowers to enter into homeownership and generate wealth. 

 

Non-QM programs have much more flexible guidelines and boast the widest variety of unique solutions such as bank statement loans, asset-only loans, no income loans, and more.  Due to the heightened risk to the lender by using more flexible underwriting guidelines, rates tend to be higher for non-QM mortgages, but can actually be quite comparable to QM loan rates depending on your credit history, financial profile, and the loan format.  In spite of the potentially heightened rates, non-QM loans have solidified their position as a critical tool for helping borrowers with unconventional financial profiles obtain the home financing they need.  The current non-QM market is estimated to be as large as $30 billion, and the average FICO score of non-QM borrowers was 771 as of 2022, extremely close to the QM average of 776.