If you’re a first-time homebuyer, or maybe it’s been a while since you’ve applied for a mortgage, the terms and acronyms can seem like a foreign language. That’s why Consumers’ mortgage pros David Pendley and Josh Summerfield are joining Lynne for this week’s edition of Money, I’m Home to share some insight on important mortgage terms.

 

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0:00:06.7 Lynne Jarman-Johnson (LJJ): Money, I’m Home, welcome in. I’m Lynne Jarman-Johnson with Consumers Credit Union. Thanks so much for joining us. From finance to fitness to homebuying, we’ve got it all for you. Hey, today, we’ve got a really cool edition of Money, I’m Home, and it’s all about mortgage terms. You know, the things that you hear that you just kind of start looking like a deer in headlights? Well, we’re going to make sure that that just goes away so you know what some of these terms mean and also how to get into that house. It’s a very tight, tight, tight market. I’ll tell you, you guys have become just so well-recognized and known for your expertise in the mortgage industry. Josh Summerfield and David Pendley are both with us here today, our consumers experts. Thanks so much guys.

0:00:49.8 David Pendley (DP): Glad to be here, everyone.

0:00:50.8 LJJ: Hey, David, I want to start with you. It seems to me that there’s a lot of acronyms that are used in mortgages and a lot of terms that seem to be inside speak, so to say. How is it that people can learn what it is that their mortgage lender is even talking about?

0:01:09.8 DP: Well, I think it’s okay to say to your mortgage lender, “Will you please put that in layman’s terms?” because we do, we’re very fast. We talk this stuff all day, every day and we tend to truncate the words and acronyms and everything else. So yeah, just tell them to slow down and explain it a little more in detail and that’s okay. My favorite people to work with is first time homebuyers because they really want to understand and I love that.

0:01:35.7 LJJ: You know, one of the terms that we actually use quite often at Consumers is ‘no PMI.’ And Josh tell us, what is PMI and why should someone care?

0:01:46.0 Josh Summerfield (JS): You know, we’re fortunate to have a number of portfolio products where we don’t have PMI on them and are able to deliver that to our members. But PMI stands for private mortgage insurance and that typically, traditionally, is paid on a monthly basis or you can do it upfront as well. There’s a couple different ways to do it, but anytime you’re over 80% loan-to-value and that’s another term LTV, loan-to-value, that you’ll hear kind of tossed around, but on conventional loans, specifically, anytime you’re over the 80% mark you have that monthly PMI, private mortgage insurance, and that doesn’t go to pay like your homeowner’s insurance, it’s nothing like that. It’s basically a higher risk loan in the Fannie Mae world, in the conventional world. So, you have this additional insurance that you pay monthly until you get below that point and then it falls off.

0:02:34.7 LJJ: You know, what’s interesting? That can run in hundreds of dollars, correct?

0:02:38.7 JS: Yeah. It’s all based on a couple factors, I guess, your loan-to-value, how high that is. So the higher your loan-to-value, the more expensive it gets and also on your credit score. So the lower your credit score, the higher that payment is going to be. So, it’s kind of on a sliding scale. It could get quite expensive. So having some other options like a no PMI loan, it’s a nice thing to be able to have.

0:02:58.8 LJJ: One of the things that, especially first-time home buyers, I remember buying my first home and not knowing the word escrow. I didn’t have one. And I did not plan ahead for that lovely tax season. So, what is an escrow, David, and how does that help somebody really stay in the planning process, especially for their finances as the interest rates are going up?

0:03:21.5 DP: Yeah. All lenders have set up escrow accounts and depending on your loan-to-value, which we’ll talk about that, your amount of down payment, some lenders require that on every loan and basically we’re setting aside money to pay two very important things. One is your real estate taxes, and as real estate taxes go up and up, it’s nice to have that budgeted. So that’s part of your monthly payment but they only come due in most cases twice a year. So, the lender sets up a little account and you pay that 1/12 each month and in preparation to pay, and in most cases the lenders will pay it for you. The other escrow account is for your insurance, sometimes just homeowner’s insurance and sometimes it’s flood insurance too, but mostly homeowner’s insurance for the fire hazard on your house.

0:04:08.2 LJJ: So how important is it that you budget ahead? Because if you’re not thinking about it that sneaks up on you. It’s similar to the PMI, if you don’t have PMI insurance and all of a sudden you go upside down, this is really kind of, you know, it’s where we’re really protecting our members.

0:04:25.6 DP: Yeah. It’s a big chunk of change when that comes due. And so, we tell almost all first time home buyers, escrow your taxes and insurance in the beginning, because it’s a way of self-budgeting, you’re self-regulating that. Usually the people who waive their escrow account or say, “Hey, I don’t want an escrow account. I want to pay my taxes and insurance myself,” they’re a little more seasoned, usually a little bit more cash reserves in their lifestyle and so forth. But you know, $4000 a year in taxes, that comes up on a very regular basis. So, it’s nice to budget for it with an escrow account.

0:05:01.6 LJJ: Josh, how do you see when people are talking with you and they’re purchasing their homes, I’ve heard debt-to-income? Tell us a little bit about what it is that we should know as we’re getting ready to purchase a home.

0:05:14.8 JS: Yeah. So, DTI, or debt-to-income as you mentioned, is a term you’ll hear tossed around by lenders quite a bit and that’s a big factor in the loan approval process. We have to look at your debt-to-income ratio. There are certain thresholds depending on loan program that we have to stay under both for a front-end ratio, which is your housing ratio, so basically your housing payment against what your income is and then your total debt ratio which is all your debts. So, your credit card, your auto loans, your boat loan, whatever other loan or revolving debt you might have is all kind of pooled together and then compared against your total income, your gross income. And that gives us what your DTI, your debt-to-income ratio is for qualification. And as I mentioned, depending on loan program, that could be capped at 38%, could be capped at 45%. And some loan programs can go up to 50%.

0:06:05.5 LJJ: And what that means is, you don’t want to have 50% or over of your income coming in going to debt that’s just sitting out there, right?

0:06:15.3 JS: Correct. Yep. So that cap on each program will tell you what the max debt-to-income ratio is you can have to qualify for that loan program. And so, it’s important to discuss that with your lender. Your lender will go through that with you and kind of give you a budget as you go out and shop to say, “Okay, this is the most you can qualify for as far as a housing payment.” So, as you’re looking for a new house, you have to keep that in mind and your taxes, insurance for the new place, all that goes into this. So that’s kind of a moving target, I guess, a little bit that you need to work through with your lender.

0:06:46.9 LJJ: And that’s why numbers really are so important, David, it’s like your credit score, right? That is a component of all of these numbers that you’re looking at to make sure that you can A, recommend the right house for someone, but B, also recommend steps to help them out if they maybe need a little help prior to getting that house.

0:07:06.5 DP: Yeah. It’s super helpful. In the old days the metrics was pretty lateral and everything was pretty much the same, but now it’s based on credit score. It’s based on loan-to-value, it’s based on your debt-to-income ratios and things. I had somebody call me the other day and said they’re building a house and they lost their job. And I said, first thing, “Call your lender.” “I’m afraid to call my lender. I’m afraid… ” I’m like, “No, no, no, your lender is your advocate.” We’re on your side of the desk. We want to help you. We will instruct you and guide you exactly what you need to do and how much income you’re going to need from your new job to actually buy this house. And so, it’s quite a variety of numbers we look at to assess each loan.

0:07:48.8 LJJ: Well, I’ll tell you what, every single month you guys give us such great information and advice. And I love the concept of you saying, “No, the lender is your trusted friend.” If they’re not, and if you have fear, you need a different [chuckle] lender because truly that is what we’re here for. So, hey, David and Josh, thanks so much. We’ll talk to you next month. Money, I’m Home, I’m Lynne Jarman-Johnson with Consumers Credit Union. And hey, thank you, Jake Esselink for your production skills. I hope everybody has a great week.

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