Carefully managing your credit history and having a good credit score are both critical factors when applying for a mortgage. There are, however, two other qualifying standards that may not get as much buzz, but are just as important in the eyes of mortgage lenders – loan-to-value (LTV) and debt-to-income (DTI).
Knowing these two numbers is just as important as knowing your credit score. They’re a good indicator of how much you can afford and will help paint your overall financial picture. Backed by years of experience and mortgage expertise, we’ve asked members of TBI Mortgage to break down each to term so you can better understand why these factors are vital to the mortgage process:
LTV is the ratio between the amount of money you borrow and the value of your home.
If the purchase price is $250,000 and the down payment is $50,000, then the loan amount would be $200,000. This equals an LTV ratio of 80% ($200,000 divided by $250,000).
Why Your LTV Matters:
Generally, buyers with lower LTV ratios will qualify for lower mortgage rates. These buyers are considered “less risky” because they have more equity in their homes and are less likely to default on their mortgage.
The LTV ratio also determines whether or not private mortgage insurance (PMI) is required. For Conventional loans, if an LTV is 80.01% or higher, PMI is necessary. This helps protect the lender in case a buyer defaults on their mortgage. You can put down as little as 3.5% with an FHA loan; but again, you’ll have to pay mortgage insurance.
DTI is the amount of your expected monthly housing payment plus other recurring debts compared to your gross monthly income.
Calculating your DTI is something you can easily do yourself and it only takes a few minutes. Here’s an example:
- First, add ALL of your recurring monthly debts. For qualifying purposes, this is the amount you pay for bills that are on your credit report like credit cards, student loans, car leases and installment loans. It excludes expenses such as car insurance, utilities and phone bill.. For instance:
- Mortgage (principal, interest, taxes, insurance, homeowners association fees) – $2,750
+ Car loans – $365
+ Student loans – $250
+ Credit card debt – use minimum payment of $100
= Total Monthly = $3,465
- Next, determine your gross income. For now, we’ll say it’s $120,000 per year or $10,000 per month.
- Lastly, divide your housing payment and total recurring monthly debts by your monthly gross income to get your DTI ($3,465/$10,000 = 0.3465. Your DTI of 34.65%)
Why Your DTI Matters:
Lenders use this ratio as one way to analyze your ability to manage payments. There’s no magic number that lenders look for, but the lower the DTI the better your chances are of being approved for a loan. Keep in mind different loan programs have various DTI standards and this is only one of the many tools lenders use today.
If you have any questions regarding mortgage financing, please visit the TBI Mortgage website.
TBI Mortgage, a subsidiary of Toll Brothers, contributed to this story.