Getting A Home Loan – Terms

You may encounter these terms when applying for a home loan:

Factors Affecting a Lender's Decision:

Appraisal

An appraisal is a professional estimate of the current market value of your home.

Combined Loan-To-Value (CLTV) Ratio

This is the ratio of the total amount borrowed against a property, compared to the appraised value of the property. For example, if you have a $40,000 1st mortgage and a $5,000 2nd mortgage on a home with an appraised value of $50,000, the CLTV is 90% ($40,000+$5,000 = $45,000 / $50,000 = 90%).

Credit Rating

A credit rating is a score that summarizes an individual's ability and tendency to repay their debts. It takes into consideration an individual's current financial status and past credit history in order to provide a rating of his or her creditworthiness.

Credit Report

A credit report is used by a lender to evaluate a potential borrower's ability and tendency to repay debts. The report, detailing an individual's credit history, is prepared by a credit bureau.

Debt-To-Income Ratio

This is a ratio that compares what an individual owes monthly to repay their debts to their gross monthly income. A ratio that is too high can indicate that further borrowing may be harmful to a person's financial stability.

Gift Funds

Gift funds are cash gifts received from a credible donor, such as a close relative, to finance a down payment or closing costs on a new home loan. Documentation of the transfer of money, as well as a letter that states that no reimbursement of the funds will be required, needs to be included in the loan file. Gifts from individuals with a financial interest in the property's sale are legally considered to be sales concessions. The value of these gifts must be subtracted from the selling price of the property, and are not treated as assets for closing the sale.

Housing Expense

This includes all housing costs, such as rent or loan payments, which include principal, interest, insurance and taxes.

Loan-To-Value (LTV) Ratio

The loan-to-value ratio compares the home loan against a property to its sales price or approximate value.

Before the Loan is Finalized:

Appraisal

An appraisal is a professional estimate of the current market value of your home.

Escrow

Escrow refers to the deposit of funds and documents from the individuals involved during the processing of a home purchase loan. They are held by a third party until all terms are met and the loan is funded.

Hazard Insurance

This is a type of insurance that covers a mortgaged property for physical damage.

Homeowners Insurance

Homeowners Insurance incorporates hazard insurance, as well as additional provisions to protect against personal liability and loss or damage to personal possessions within the home.

Impound or Escrow Account

This is an account made up of a percentage of monthly payments gathered and disbursed by a lender to pay for insurance, taxes and other costs.

PMI (Private Mortgage Insurance)

Private Mortgage Insurance is insurance coverage that protects a lender against non-payment of a home loan.

Title Insurance

This type of insurance offers protection against property ownership disputes. A lender title policy is needed, and individuals must buy separate policies to protect themselves as homeowners.