FHA Home Loan Terms You Should Know
January 4, 2022
If you are new to the home loan process and want to apply for an FHA mortgage, you’ll encounter some technical terms that might be confusing at first. But the more familiar you get with the home loan process, the more these new terms will make sense. Especially when it comes to things like the loan-to-value ratio, your debt-to-income ratio, etc.
Loan-to-Value Ratio (LTV)
This refers to the amount of the FHA loan versus the appraised value of the home. If you had a home loan with no down payment and the amount of the loan is equal to the appraised value, the loan-to-value ratio would be 100%.
But FHA mortgages require a minimum down payment of 3.5%, which makes your loan to value ratio 96.5%. LTV is an important calculation for both purchase loans and refinances.
Debt-to-Income Ratio or Debt Ratio
This refers to 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% in general, with 35% or less being a worthy goal.
Lender Overlays
The lender’s “overlays” refer to the standards that may be applied above and beyond the FHA minimum requirements. For example, the FHA minimum FICO score range for the lowest down payment is 580 or higher. But your lender’s standards for the lowest downpayment may be closer to the mid-600s.
Comparables
This is a term you may not experience in the home loan process until you have actually found a property you want to purchase.
A “comparable” is a property similar to the one you want to buy. These are used by an appraiser to make comparisons that can help establish the fair market value of the house. Does the house you want to buy have features that are above and beyond the standard ones? That might change the valuation of the home when compared to similar properties that don’t have superior materials, construction, etc.
The appraiser may rely on comparable properties as a benchmark and whether the home you want to buy lives up to that standard or fails to will inform the valuation of the property.
Mortgage Insurance
Why do we include this fairly basic term in our list? Because often mortgage insurance is in concept misinterpreted as homeowner’s insurance. But mortgage insurance is protection for the lender in case you default on the mortgage and does not offer coverage for the house, its contents, or occupants against loss or damage.
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Do What You Can to Avoid Foreclosure
Homes Financed With FHA Loans Must Be Owner Occupied
FHA Programs for First-Time Homebuyers
Loan-to-Value Ratio (LTV)
This refers to the amount of the FHA loan versus the appraised value of the home. If you had a home loan with no down payment and the amount of the loan is equal to the appraised value, the loan-to-value ratio would be 100%.
But FHA mortgages require a minimum down payment of 3.5%, which makes your loan to value ratio 96.5%. LTV is an important calculation for both purchase loans and refinances.
Debt-to-Income Ratio or Debt Ratio
This refers to 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% in general, with 35% or less being a worthy goal.
Lender Overlays
The lender’s “overlays” refer to the standards that may be applied above and beyond the FHA minimum requirements. For example, the FHA minimum FICO score range for the lowest down payment is 580 or higher. But your lender’s standards for the lowest downpayment may be closer to the mid-600s.
Comparables
This is a term you may not experience in the home loan process until you have actually found a property you want to purchase.
A “comparable” is a property similar to the one you want to buy. These are used by an appraiser to make comparisons that can help establish the fair market value of the house. Does the house you want to buy have features that are above and beyond the standard ones? That might change the valuation of the home when compared to similar properties that don’t have superior materials, construction, etc.
The appraiser may rely on comparable properties as a benchmark and whether the home you want to buy lives up to that standard or fails to will inform the valuation of the property.
Mortgage Insurance
Why do we include this fairly basic term in our list? Because often mortgage insurance is in concept misinterpreted as homeowner’s insurance. But mortgage insurance is protection for the lender in case you default on the mortgage and does not offer coverage for the house, its contents, or occupants against loss or damage.
------------------------------
RELATED VIDEOS:
Do What You Can to Avoid Foreclosure
Homes Financed With FHA Loans Must Be Owner Occupied
FHA Programs for First-Time Homebuyers
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