As a first-time homebuyer (even some experienced homebuyers), you may be overwhelmed with all of the mortgage jargon and acronyms when you’re filling out your pre-approval application. Words like FHA, DTI, ARM, MI, MLS and EMD may have completely different meanings to you or have no meaning at all. Let’s take a closer look at some of the commonly used mortgage abbreviations home buyers need to know. Here's six you’ll want to know.
FHA (Federal Housing Administration)
An FHA loan is a US Federal Housing Administration mortgage insurance backed loan which is provided by an FHA-approved lender. FHA loans are known for accepting as little as 3.5% down payment, in comparison to the conventional loans which typically have a 20% down payment requirement. FHA loans also allow credit scores in the 500’s, as opposed to the conventional loans 600’s. FHA is a common choice for first time home buyers, but it’s not limited to only first timers.
DTI Ratio (Debt to Income Ratio)
This is a crucial area. When lenders are processing your application, they want to see if you are able to pay a mortgage with your funds including your income and taking into consideration all of your monthly debts. For example, if you are looking to buy a $400,000 home, and you and your spouse make $120,000 a year combined, but you have to pay for student loans for both of you, 2 car payments, 2 car insurance payments, health insurance, and high retail credit cards, your DTI ratio would be higher than if you made $120,000 a year combined and only had to pay retail credit cards and car insurance.
ARM (Adjustable-Rate Mortgage)
An ARM is not just the area between your hand in your shoulder, in mortgage terms it’s a type of mortgage in which the interest rate paid on the outstanding balance varies according to a specific benchmark. A 7-year ARM is a loan with a fixed rate for the first 7 years (based on the rate you first buy your home), and an adjustable rate every year thereafter. Because the interest rate can and will change after the first 7 years, the monthly payment can also change. Different from a fixed rate mortgage, which never changes throughout the life of the loan.
MI (Mortgage Insurance)
MI means mortgage insurance, and you’ll sometimes see it written as PMI (private mortgage insurance) or LMPI (lender-paid mortgage insurance). Mortgage insurance is required if your down payment on a home is less than 20 percent of the appraised value or sale price. If you go with an FHA loan, you will have mortgage insurance if you only pay 3.5% down. Mortgage insurance protects the lender in the event of a default on the mortgage loan.
MLS (Multiple Listing Service)
MLS refers to the Multiple Listing Service. The MLS is used by listing brokers to their real estate brokers to share information about properties for sale. Many photos and bits of information found on sites such as Redfin and Zillow are courtesy of the MLS.
EMD (Earnest Money Deposit)
Earnest money is a deposit made to a seller showing the buyer’s good faith in a transaction. Earnest money allows the buyer additional time when seeking financing. When buying new construction, it’s typical to pay earnest money when you agree to buy the home a few months before the actual home is built. The amount of the EMD depends on the demand for homes. In a slow real estate market where the seller isn’t getting many offers you may only have to pay $500-$1000, but in a fast-moving market you may have to make a bigger deposit to seller to show that you are a serious buyer.