March 22, 2023
If you are new to the home loan process, there are some vocabulary terms you’ll want to know as you start to plan and save for your FHA home loan in 2023. It pays to do your homework ahead of time in a housing market like the one we’re experiencing now. Every advantage helps.
As you start to research your mortgage options and talk to industry professionals, you’ll likely hear or read some technical terms that may be confusing..at first.
The farther you get in the home loan process, the more these new terms will become clear and make sense. Here are some terms you will likely learn more about in the coming months.
Comparables
You may not experience this loan jargon in the earlier part of the home loan process but you may once you have found a property you want to buy.
A “comparable” is, at the most basic level, a property similar to the one you are buying. Comparables are used by an FHA appraiser to make comparisons needed to establish the fair market value of the house.
Does the house you want to buy have better features than “standard” ones? That might change the home’s valuation compared to similar properties and vice-versa.
Loan-to-Value Ratio (LTV)
This is the amount of the FHA loan compared to the home’s appraised value. If you apply for a hypothetical home loan with no down payment with a home loan equal to the appraised value, the loan-to-value ratio would be 100%.
FHA mortgages require a minimum down payment of 3.5%, which makes your loan-to-value ratio 96.5%.
Debt-to-Income Ratio or Debt Ratio
The amount of an FHA borrower’s monthly income as compared to the amount of monthly financial obligations. Ideally, you want your debt ratio well below 50%, with 30% being ideal.
Lender Overlays
“Overlays” is a term that refers to the standards imposed by the lender above and beyond the FHA minimum requirements.
This practice is permitted for participating lenders and you may experience lender overlays in various areas including down payment and FICO score requirements.
For example, the FHA minimum FICO score range for the lowest down payment is 580 or higher. But your lender’s standards (the overlays) for the lowest downpayment may be closer to the mid-600s.
Mortgage Insurance
Mortgage insurance is sometimes misinterpreted as homeowner’s insurance, but the two could not be farther apart regarding intent and usefulness.
Mortgage insurance protects the lender in case you default on the mortgage. It does not offer coverage for the house, contents, or occupants against loss or damage. That is the role of homeowners insurance, and unless you seek out and obtain homeowner’s insurance, you do not have coverage.
Furthermore, certain conditions covered under homeowner’s insurance must be mentioned by name. For example, you may have coverage against certain kinds of water damage from burst pipes or other issues.
But when it comes to flood concerns, if you do not have flood coverage specifically named in your insurance, you may not have coverage against floods or any other problem not specifically named.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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