Debt-to-Income Ratio

DTI: debt-to-income ratio. This is exactly what it sounds like: the ratio of your debt payments to your monthly gross income. There is a “front-end” ratio and a “back-end” ratio

Say the minimum payments on the bills on your credit report (including student loans) adds up to $780/mo, you make $5000/mo, and your est. housing payment for this new house (including taxes and insurance) is $1500/mo – your ratios would look like this:

($1500 / $5000) * 100 (to get a percentage) = 30% This is called your front-end or housing ratio as it takes into account ONLY your proposed housing payment in relation to your monthly income. This is important sometimes, but not as critical as your back-end ratio, which includes your monthly debts: (($780 + $1500) / $5000) * 100 = 45.6%

This back end ratio limit differs depending on what program you’re using. Most conventional loans where you’re putting less than 20% down have a 45% limit NOT inclusive of your mortgage insurance payment. Conventional loans where you’re putting 20% or more down allow this ratio to go up to 50%. FHA loans allow this ratio to go up to 56.9% with compensating factors but most lenders will allow up to 50% without compensating factor. FHA loans are where that front-end ratio becomes important – their front-end limit is 46.9% as is, your housing payment can’t be more than 46.9% of your gross monthly income.

VA loans are weird in that you can have nearly limitless DTI range as long as you have a certain amount of residual income per month (I’ve see DTIs up to 65% be accepted with adequate residual income). Residual income is the income you have left over per month after making your housing payment and paying the bills listed on credit and this amount is calculated off your NET income (as in, we figure out your payroll taxes and deduct that from the monthly income in file). In this case, your residual income would be about $1220/mo assuming a 30% tax rate: 5000 – (5000 * 30%)= $3500 – 1500 – 780 = $1220/mo.

LTV/CLTV: loan-to-value or combined loan-to-value ratio. This is all about your property. This is the loan amount for your loan with respect to the sales price or appraised value (whichever is lower).

So, if you’re buying a house and your sales price is $300,000 and you’re putting 5% down, your LTV is 95% because your loan amount would be $285,000 and $285,000 / $300,000 = 0.95 or 95%.

If your LTV is over 80%, you’re going to be required to get mortgage insurance or a 2nd lien to cover the difference. Lets say you have 10% to put down. You can go 2 ways: do a 90% LTV loan and get mortgage insurance which can be paid in 1 lump sum at closing or can be added to your monthly payment. Or you can get a 10% 2nd lien, usually called an 80/10/10. In this case, your COMBINED LTV would be 90% because the amount of your 2 loans combined are 90% of your sales price.

If you get into the unfortunate situation of having the appraised value of the home you want coming in lower than your sales price and your seller is not going to adjust the sales price accordingly, you’ll have to bring in the difference to accommodate the LTV requirements.

The LTV is another factor that determines the interest rate available to you.

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