Mortgage Acronyms Explained

Here’s a list of mortgage acronyms that lending &  mortgage professionals recommend you learn:

ARM (Adjustable Rate Mortgage): While fixed-rate mortgages have the same interest rate and monthly payment for the life of the loan, the interest rate and monthly payments on an ARM change. ARM interest rates are typically fixed for a period between three and 10 years before starting to adjust. The new payment is calculated using a rate based on an underlying index like LIBOR (not an acronym you need to know, but it stands for “London Interbank Offered Rate”) or the Constant Maturity Treasury (CMT), for example, plus a margin. Understanding how your rate can change and how this can increase your payment is very important.

DTI (Debt-to-Income): This ratio is the percent of your income that goes toward paying monthly bills. Lenders typically require DTIs below a specified percent for you to qualify for certain loan products.

GFE (Good Faith Estimate): This is a federally required document that includes the lender’s name and address; loan terms like loan type, amount, and interest rate; sales price; and an estimate of the various settlement charges and fees, including the appraisal fee, credit report fee, lender fees, inspection fees, title and escrow fees, settlement fees, and any loan-origination fees. The final GFE should match the HUD-1 statement, which also lists the loan terms.

HELOC (Home Equity Line of Credit): It works like a credit card, except you draw against the equity in your home.

IO (Interest Only): These are monthly payments of just interest, sort of like what you owe someone. Certain mortgages allow for these lower payments for a specified period. These loans work best for consumers who expect a significant bump in income or plan to refinance or move prior to the end of the interest-only term.

LOX (Letter of Explanation): These are short letters provided to a lender that can help you qualify for your mortgage by explaining why your income has changed, your rental history, or any late payments, for example.

LTV (Loan-to-Value): This ratio is calculated by dividing the loan amount by the home’s purchase price. When people put 20% down, their LTV is 80%, and lenders have special programs for borrowers who put down less than 20%.

MIP (Mortgage Insurance Premium): A fee that’s financed as part of the loan and charged by the government for Federal Housing Administration (FHA) loans. This special program allows first-time buyers to put down less than 20% on their purchase.

P&I (Principal and Interest): These payments are the amount due every month on your mortgage.

PITI (Principal, Interest, Taxes, and Insurance): Your total monthly housing expense, which includes the P&I payment due on your mortgage, and the taxes and insurance on your house.

PMI (Private Mortgage Insurance): An extra fee you pay when your down payment is less than 20%.

POC (Paid Outside of Closing): Fees that are paid upfront with your loan application, like appraisal or inspection fees.

QMs (Qualified Mortgages): Must meet certain requirements specified by the Dodd-Frank Wall Street Reform and Consumer Protection Act, such as loan amount, interest rate, and underwriting, so they can be purchased by a government-sponsored entity (GSE).

RESPA (the Real Estate Settlement Procedures Act): More like a map than a Vespa scooter since it requires that you receive certain disclosures about closing costs and settlement procedures, such as the GFE, at certain times during the mortgage process.

TIL (Truth in Lending): Statements issued with the GFE and which provide detail on the loan terms in a standard format, to include the interest rate, number of payments, late charges, and prepayment penalties.

VOE (Verification of Employment): Proof of your income with W-2s, pay stubs, or income tax returns.