FHA Loan Terms Defined

If you are new to the home loan process in 2022, there are some vocabulary terms you’ll want to know as you start to plan and save for your FHA home loan.

As you start to research your mortgage options and talk to industry professionals, you’ll likely hear or read some technical terms that may be confusing..at first.

The farther along you get in the home loan process, the more these new terms will start to become clear and make sense. Here are some of the terms you are likely to learn more about in the coming months.

Comparables

You may not experience this phrase in the earlier part of the home loan process but you may once you have found a property you want to buy.

A “comparable” is, at the most basic level, a type of property similar to the one you are buying. Comparables are used by an FHA appraiser to make comparisons needed to establish the fair market value of the house.

Does the house you want to buy have features that are better than “standard” ones? That might change the valuation of the home when compared to similar properties, and vice-versa.

Loan-to-Value Ratio (LTV)

This is the amount of the FHA loan compared to the appraised value of the home. If you apply for a hypothetical home loan with no down payment with a home loan equal to the appraised value, the loan-to-value ratio would be 100%.

FHA mortgages require a minimum down payment of 3.5%, which makes your loan to value ratio 96.5%.

Debt-to-Income Ratio or Debt Ratio

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 30% being ideal.

Lender Overlays

“Overlays” is a term that refers to the standards imposed by the lender above and beyond the FHA minimum requirements.

This practice is permitted for participating lenders and you may experience lender overlays in a variety of areas including down payment and FICO score requirements.

For example, the FHA minimum FICO score range for the lowest down payment is 580 or higher. But your lender’s standards (the overlays) for the lowest downpayment may be closer to the mid-600s.

Mortgage Insurance

Mortgage insurance is sometimes misinterpreted as homeowner’s insurance, but the two could not be farther apart in terms of intent and usefulness.

Mortgage insurance is protection for the lender in case you default on the mortgage. It does not offer coverage for the house, its contents, or occupants against loss or damage. That is the role of homeowners insurance and unless you seek out and obtain homeowner’s insurance, you do not have coverage.

Furthermore, certain conditions covered under homeowner’s insurance must be mentioned by name. For example, you may have coverage against certain kinds of water damage from burst pipes or other issues.

But when it come to flood concerns, if you do not have flood coverage specifically named in your insurance (often under “rising water”) you DO NOT have coverage against floods or any other problem not specifically named.

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