Mortgage Glossary
The vocabulary lenders use. In plain English.
DTI (Debt-to-Income Ratio)
Debt-to-Income ratio is your total monthly debt payments divided by your gross monthly income, expressed as a percent. Lenders use two versions: front-end DTI (housing costs only) and back-end DTI (all debt including housing). Most conventional loans cap back-end DTI at 45%–50%, with the 36% level producing the best interest rates. DTI is the single most important factor in mortgage approval for most borrowers — larger than credit score for qualified loans.
28/36 Rule
The 28/36 rule is the traditional affordability guideline used by most mortgage lenders. Your housing payment (principal, interest, taxes, and insurance — PITI) should not exceed 28% of gross monthly income, and your total monthly debt should not exceed 36%. Some lenders approve up to 43% back-end DTI (the Qualified Mortgage cap) or even 50%, but the 36% level is the conservative target that protects against payment stress.
PITI (Principal, Interest, Taxes, Insurance)
PITI is the four components of a typical mortgage payment: principal (paying down the loan), interest (paying the lender), property taxes (escrowed to pay your local government), and homeowner's insurance (escrowed to pay your insurer). Lenders calculate your front-end DTI using PITI — not just principal and interest — which is why property tax rates and insurance costs directly affect how much house you can afford.
PMI (Private Mortgage Insurance)
Private Mortgage Insurance is an added monthly charge required by conventional lenders when your down payment is less than 20%. PMI typically costs 0.5%–2.0% of the loan amount per year, charged monthly. It protects the lender (not you) in case of default. PMI is automatically removed once you reach 22% equity in the home, or you can request removal at 20% equity with a clean payment history. FHA loans have a similar but different charge called MIP.
LTV (Loan-to-Value Ratio)
Loan-to-Value is the loan amount divided by the home's appraised value, expressed as a percent. An 80% LTV means you borrowed 80% and put 20% down. LTV determines whether you pay PMI (anything above 80% on conventional) and affects your interest rate (lower LTV = lower rate). Refinancing options open up once LTV drops below 80% through equity gains or prepayment.
Escrow
An escrow account is a separate account your lender maintains to pay your property taxes and homeowner's insurance on your behalf. Each monthly payment includes an estimated 1/12 of the annual tax and insurance bills. The lender pays those bills directly when due. Lenders require escrow on most loans above 80% LTV. Annual escrow analysis can result in payment changes if taxes or insurance rise.
Conventional Loan
A conventional mortgage is any loan not backed by a government program like FHA, VA, or USDA. Most conventional loans are sold to Fannie Mae or Freddie Mac, so they must meet those agencies' guidelines (conforming loans). Minimum down payment can be as low as 3% for first-time buyers (Conventional 97 program). Conventional loans typically require a credit score of 620+ and charge PMI if you put less than 20% down.
FHA Loan
An FHA loan is backed by the Federal Housing Administration and designed for borrowers with lower credit scores or smaller down payments. Minimum down payment is 3.5% with a 580+ credit score (10% with 500–579). FHA loans charge both an upfront MIP (1.75% of loan amount) and monthly MIP. Unlike conventional PMI, FHA MIP lasts for the life of the loan on down payments below 10% — the only way to remove it is refinance to conventional.
Property Tax
Property tax is a local government tax on real estate, typically assessed annually as a percentage of the home's assessed value. US rates range from 0.27% (Hawaii) to 2.49% (New Jersey), with a national average near 1.1%. Property tax is paid through escrow in most mortgages and is included in your front-end DTI calculation. High-tax states can reduce affordability by $200–$800/month compared to low-tax states at the same home price.
Front-End DTI
Front-end DTI is the ratio of your total housing cost (PITI — principal, interest, taxes, insurance, plus HOA if applicable) to gross monthly income. The 28/36 rule's 28% is the front-end cap. This ratio tells lenders whether your housing payment alone is sustainable. Most lenders weigh back-end DTI more heavily in approval decisions but use front-end DTI to flag borrowers at risk of being house poor.
Back-End DTI
Back-end DTI is the ratio of all monthly debt (housing plus credit cards, student loans, auto loans, alimony, child support, and other obligations) to gross monthly income. This is the number lenders care about most for approval — the 36% in 28/36. Qualified Mortgage rules cap back-end DTI at 43% for most conventional loans. Some portfolio lenders allow up to 50% with compensating factors like high credit score or large reserves.
House Poor
House poor describes a homeowner who spends such a large share of income on housing that they cannot afford other essentials or savings goals. Typically triggered by buying at or above the maximum DTI a lender approves. Symptoms include no emergency fund, inability to save for retirement, reliance on credit cards for basic expenses, and deferred maintenance. Avoided by targeting 28% front-end DTI or below, not the 45%+ lender ceiling.