The Money Coach
  • About
    • Meet Lynnette
    • Media Kit
  • Contact
  • Subscribe
  • Submit an Article
  • Books
  • Categories
  • Coaching
  • Book Lynnette
  • Money Coach University™
No Result
View All Result
The Money Coach
  • About
    • Meet Lynnette
    • Media Kit
  • Contact
  • Subscribe
  • Submit an Article
No Result
View All Result
The Money Coach
No Result
View All Result

Two Important Mortgage Terms You Need to Understand

Lynnette Khalfani-Cox, The Money Coach by Lynnette Khalfani-Cox, The Money Coach
in Real Estate
Reading Time: 4 mins read
Text MORTGAGE APPLICATION on Office desk table with keyboard, notepad and analysis chart on a white background.
6
SHARES
105
VIEWS
Share on FacebookShare on TwitterShare on LinkedIn

Getting a home loan can be a confusing process. 

You have to decide whether to get a fixed-rate mortgage or an adjustable-rate loan. You’ll want to shop around and qualify for the best loan rates and terms. And when you’re signing on the dotted line for one of the biggest purchases of your life, you naturally want to fully understand everything. 

So, one way to make the home loan process easier is to understand some important lingo you might hear from experts in the mortgage industry. 

Here are two confusing mortgage terms made simple. 

1. DTI or Debt-To-Income Ratio 

When a lender mentions your DTI, he or she is talking about how much debt you owe compared to how much income you bring home on a monthly basis.

This is an important consideration because if you’re approved for a mortgage, the lender wants to be sure you’ll be able to repay that obligation. This is why lenders make a careful review of your existing debts before saying “Yes” to a loan application. 

But not all of your monthly financial obligations are considered when calculating your monthly debt-to-income ratio. 

For example, your utility bills, the money you spend eating out, and the cash you might dole out for daycare expenses are not included in your DTI. 

Instead, the lender will look at the traditional credit obligations that are reflected on your credit reports – such as your credit card payments, auto loan, and student loan – along with any current mortgage/housing payment you’re making.

To compute your DTI, your monthly debts are divided by your monthly take-home pay. 

For example, if your total monthly credit obligations are $2,000 a month and your net, take-home pay is $5,000 a month, you have a 40% DTI ($2,000 / $5,000 = .40) 

Debt-to-income ratios can vary by loan type, such as if you’re purchasing a home versus refinancing a home loan. Additionally, every lender has its own DTI guidelines. But most lenders will require that your monthly expenses not exceed roughly 42% to 50% of your monthly income, meaning your DTI typically needs to be lower than 50%. And that 50% level is being generous; most lenders cap your DTI at 43% to 48% for conventional mortgages. 

For government-insured loans, like an FHA loan, however, your DTI can be as high as 57% — provided you have other compensating factors, like a high credit score, steady employment of hefty cash reserves after closing on a home loan.

Front End DTI Vs. Back-End DTI 

Front-end DTI and back-end DTI are two important calculations used by lenders to assess your ability to repay a mortgage.

Front-end DTI: This ratio compares your proposed monthly mortgage payment (including principal, interest, property taxes, and insurance) to your gross monthly income. It is also referred to as the housing ratio. 

Lenders use this ratio to determine if you can afford the mortgage payment. A typical front-end DTI limit is around 28%, but it varies depending on the lender and the loan program.

Back-end DTI: This ratio considers all of your monthly debt obligations, including the proposed mortgage payment, in comparison to your gross monthly income. It includes not only the mortgage payment but also your other debts such as credit card payments, student loans, car loans, and other recurring monthly obligations. 

Lenders use this ratio to determine if you can handle all your existing debts in addition to the new mortgage. A common back-end DTI limit is around 36%, but again, it can go much higher, based on the lender and the loan program.

Both front-end and back-end DTI ratios are crucial in the mortgage qualification process, as they help lenders evaluate your overall financial strength and your ability to manage financial obligations responsibly.

Mortgage Points

A mortgage point is simply a fee you can pay to lower the interest rate on a home loan. An easy way to understand points is to know that one point is equal to one percent of a home loan. 

So, if you obtained a $300,000 home loan, paying one point on that loan would mean paying $3,000. 

Why would you want to do this? To lower your long-term borrowing costs. 

Assume that paying a point lowers your interest rate by 1/4th of a percent, which cuts your mortgage payment by $100 a month. If so, paying $3,000 in points means that in 30 months (2.5 years) you would have recouped your money. As long as you plan to live in the house for 2.5 years, paying the point was worth it. 

In fact, the longer you plan to live in a house the more worthwhile it becomes to pay mortgage points and save money over the long haul.

Check out our articles on homeownership for tips and mortgage terms you need to know.

Previous Post

The Pros and Cons of Pre-Settlement Funding

Next Post

How to Apply for a Pell Grant and Get Money for College

Lynnette Khalfani-Cox, The Money Coach

Lynnette Khalfani-Cox, The Money Coach

Lynnette Khalfani-Cox, The Money Coach, is a renowned financial expert, author, speaker, and media personality, empowering people to achieve financial success.

Related Posts

Beautiful home

Refinansiering Med Sikkerhet I Bolig – Refinancing with Security in Homes

by AskTheMoneyCoach UK Edition

Refinancing Your Home There are many reasons to refinance your home, but usually, it is to save a money on your monthly payments. You can also refinance for other reasons, but these are the most common. This can be accomplished by lowering your interest rate or extending the length of...

long way road of asphalt with white straight line in the middle and infinite direction and travel distance concept. asphalt and mountains around for traveler and adventure concept. no cars no people long-distance move

Making a Long-Distance Move? Here’s How to Budget and Plan for Success

by AskTheMoneyCoach

Moving can be exciting, but it can also be one of the most stressful experiences you will ever face. This is especially true when you are moving long-distance.  Whether you are moving for a new job, to be closer to family, or simply for a change of scenery, it is...

Sad unhappy black female and male in red t-shirts look at computer, have problems with gadget, service and bills

The True Cost to Get Rid of Your Timeshare

by AskTheMoneyCoach

Owning a timeshare can be a great way to enjoy vacations, but it's not for everyone. If you want to get rid of your timeshare, you may be wondering about the costs involved. From legal fees to transfer fees, there are several expenses to consider. This guide will help you...

African American real estate agent professionally explaining about housing agreement to couple

Negotiating Your Rental Agreement: Tips for Saving Money

by AskTheMoneyCoach

When searching for a new home, you’ve probably come across some great places just slightly out of your budget. If this is the case, and you really want the place, you could try negotiating your rental agreement to get precisely what you want. Many landlords will be open to adjusting...

VA loan. US department of veterans affairs papers.

VA Loans Help Veterans Achieve Their Dream of Homeownership

by AskTheMoneyCoach

For many Americans, the dream of owning a home is a significant aspiration. However, this can be challenging for some individuals, especially those who have served in the military. Fortunately, an exceptional program provides extra assistance to veterans and current active service members in achieving their property-owning dreams. This program...

A perfect neighborhood. Houses in suburb in the north America. Top of a house with nice windows over blue sky. Beautiful Home Exterior. Real Estate Exterior Front House

The Truth About Race and Homeownership – Video

by Lynnette Khalfani-Cox, The Money Coach

https://youtu.be/JjKNdxrKIVwIn this video "The Truth About Race and Homeownership," I discuss the sad truth about race, homeownership, age, and other factors in America. I mention two recent research reports, one from the National Association of Realtors and the other from the Federal Reserve Bank of New York, highlighting the problem. According...

low-ball home appraisals

10 Powerful Ways To Fight Discrimination in Home Appraisals

by Lynnette Khalfani-Cox, The Money Coach

I’ll never forget the time in 2019 when my husband and I applied for a home equity line of credit (HELOC) for our home in Mountainside, New Jersey – an upper middle-class suburb about 45 minutes outside New York City.  To get a HELOC, our home had to first be...

Load More

Popular Posts

  • Car repair

    What to Do If You Can’t Afford a Car Repair Bill

    1529 shares
    Share 612 Tweet 382
  • What to Do if Your Spouse Stole Money From You

    1311 shares
    Share 524 Tweet 328
  • What to Do If You Can’t Afford to Leave Your Spouse

    1276 shares
    Share 510 Tweet 319
  • Here’s Why I Pay My Kids For Good Grades (And Maybe You Should Too)

    1131 shares
    Share 452 Tweet 283
  • What Do All Those Strange Codes In My Credit Report Mean?

    901 shares
    Share 360 Tweet 225
  • Which Credit Report is More Important: Equifax, Experian or TransUnion?

    869 shares
    Share 348 Tweet 217
  • Do This Now If Your Wages Were Not Reported

    855 shares
    Share 342 Tweet 214

Categories

  • Bankruptcy
  • Budgeting
  • Building Wealth
  • Careers
  • Couples and Money
  • Coupons and Deals
  • Covid-19
  • Covid-19 Video
  • Credit Cards
  • Credit Reports
  • Credit Scores
  • Crypto
  • Debt
  • Entrepreneurship
  • Family Finances
  • Featured
  • Identity Theft
  • Insurance
  • Investing
  • Loans
  • Paying for College
  • Personal Finance
  • Press Releases
  • Real Estate
  • Retirement
  • Saving Money
  • Scams
  • Student Loans
  • Taxes
  • Uncategorized

All information on this blog is for educational purposes only. Lynnette Khalfani-Cox, The Money Coach, is not a certified financial planner, registered investment adviser, or attorney. If you need specialty financial, investment or legal advice, please consult the appropriate professional. Advertising Disclosure: This site may accept advertising, affiliate payments or other forms of compensation from companies mentioned in articles. This compensation may impact how and where products and companies appear on this site. AskTheMoneyCoach™ and Lynnette Khalfani-Cox, The Money Coach® are trademarks of TheMoneyCoach.net, LLC.

©2009-2023 TheMoneyCoach.net, LLC. All Rights Reserved.

RSS / Sitemap /Submit an Article / Privacy Policy / LynnetteKhalfaniCox.com

No Result
View All Result
  • Books
  • Categories
  • Contact Lynnette
  • Get Coaching
  • Book Lynnette
  • Money Coach University™
  • Home
  • Subscribe to Newsletter
  • Submit an Article

©2009-2023 TheMoneyCoach.net, LLC. All Rights Reserved.

Welcome Back!

Login to your account below

Forgotten Password?

Retrieve your password

Please enter your username or email address to reset your password.

Log In

Add New Playlist