Commonly Used Mortgage Terms
Debt to Income Ratio (DTI)- One of the first factors a lender may consider when deciding how large a mortgage loan you qualify for is your debt to income ratio, or DTI. To calculate your DTI, add up your current monthly debt (credit card payments, car loans, ect) and divide it by your total monthly pre-tax gross income. This percentage ratio is a simple way of showing how much of your income is available to make a morgage loan payment after all other continuing debt obligations are met.
Lenders often call this the 28/36 qualifying ratio. The first number , 28% indicates the maximum amount of your monthly pre-tax gross income that the lender allows for monthly expenses. This amount will include principal and interest of the loan, property taxes, and homeowner's insurance, or PITI. The second number, 36%, refers to the maximum percentage of your monthly pre-tax gross income that the lender allows for a ll monthly housing expenses plus all recurring debt.
If your numbers are higher than 28/36, you may want to consider reducing debt by paying off credit cards or other loans before starting your home search.
Down payment- The down payment is part of the purchase price of a property that the buyer pays, usually in cash, ad is not included in the loan amount. Most lenders require 5-20% of the purchase price of the home, depending on the type of morgage loan.
Private Mortgage Insurance- Any down payment less than 20% will require Private Mortgage Insurance, which protects the lender against loss if a borrower defaults on a loan. PMI can usually be cancelled when the homeowner builds up enough equity in the home.
Interest Rate- The interest rate is the cost of borrowing money.
