Debt-to-Income (DTI) is one of the key ratios lenders use to assess and approve loan applications. Determining your current financial obligations versus your existing earnings is one part of a lending institutions necessary evaluation of your capability to pay back a loan. Like the video states: financial obligations are existing monetary obligations; a vehicle payment is a financial obligation while a grocery expense is not. To compute your debt-to-income ratio, assemble your month-to-month financial obligation payments and divide them by your GROSS regular monthly earnings. (Gross earnings is the money you make BEFORE taxes and other reductions.) The Federally-established debt-to-income target is currently 43% for Qualified Mortgages, although some experts advise aiming for a more conservative figure — less than 36%. If your DTI is greater than the Federal guidelines, other loans might be available. These may also involve more documentation and data to establish your ability to repay. Rates for these are likely to be different from those offered for Qualified Mortgages. High debt-to-income ratio puts a property owner at higher threat of challenges to making regular monthly payments. Review your scenario and risks thoroughly if DTI is an obstacle.

How do you apply for a mortgage? First, assemble this information: Tax returns and bank statements for the past 2 years. W-2 forms for the past 2 years Pay stubs for the past 3 months Documentation of any long-term debts Proof of any non-payroll income When youre far enough in shopping for a home to make an offer, add these things: Address and description of the property A sales contract on the home Identify lenders and submit a loan application. If your credit is frozen, be prepared to unfreeze it for the credit history and credit-rating reports the lender will order. The lender will order an appraisal and (in some cases) possibly an inspection. Expect additional questions and clarifications as they go through the process of evaluating your ability to repay the loan. The process usually takes more than a week, and delays of up to 6 weeks arent uncommon. Be patient, and keep copies of everything.

If financial circumstances arent working, and you are falling behind on mortgage payments, hoping the lender wont notice isnt a solution. Talking with them about loss mitigation options is better. Lenders may be able to arrange a "workout package" to help get things back on track. Mortgage loans are often "sold"; the lender who is servicing the loan — the lender to whom you send checks — has the financial interest in your situation. Talk with that lender, not the original lender. If Fannie Mae or Freddie Mac — both government-sponsored enterprises involved in mortgage lending — have acquired your loan, there are Federal guidelines that they may apply to your situation. They are not there to deal directly with borrowers (you), but they may be able to work with the lender of record to determine the loss-mitigation guidelines that best fit your situation. Be vigilant about companies that "just want to help". Look out for: Financial counseling agencies with high fees; they may be charging for advice you can get for free. Equity Skimming — companies (or individuals) who offer to repay the mortgage or sell the property if you sign over the deed. And do not sign anything related to your home until you understand it thoroughly.

Can a mortgage be paid off ahead of schedule, and is it a good idea? Those are two separate questions. Most mortgages allow early payoff, but you should make sure you understand any payoff terms or restrictions in your specific loan. Some loans have prepayment charges. People sometimes accelerate payoff by sending extra money each month, or with an extra yearly payment. If you do this, indicate in writing that the excess funds should be applied to reducing principal. Record the payments and instructions! Whether paying off ahead of schedule is in your financial interest is a complicated calculation. If you have the ability to do it, and prepayment penalties arent an issue, you will reduce the interest you pay over time. But reducing a low-interest-rate loan by taking funds from higher-interest-rate investments may not be in your interest. (Note: Payment used against principal is not tax-deductible!) Your lender is one source of advice, but financial planning for you is not their core business. If you have the option, get advice from a financial planning professional when considering something like early payoff.

Equity is a key financial and legal term, but its not taught in school. Understanding the basic concept is very much in your long-term interest! (While equity is also used as a social term, this is just about the financial and legal sense of the word.) At heart, equity is "value owned." If you have equity in a home, or a company, you legally own some part of itscurrent value. If the value of the asset goes up, that part that you own becomes more valuable. In homes and mortgages, this idea of "the part you own" and "current value" are critical. As the example in this video shows, the value of the home changes separately from the size of the loan. You might own a $300K home today, and owe $200,000 — your equity is $100,000 in the current market. If the home is valued at $600K a few years later, and your loan principal hasnt changed (unlikely, but this is just an example), your equity would be worth $400K, and youd owe $200K. As the asset (property) value goes up, or the amount owed goes down, your equity grows. Generally speaking, assets like homes tend to go up in value over time. Equity becomes a financial tool for the owner; for example, as collateral. Because home equity is usually one of the biggest assets people accumulate, it should be treated carefully. Get financial advice before treating home equity like a giant piggy bank.

"Prime has dropped (or raised) 0.X%" Youll see some version of that headline all the time, particularly if youre looking for a mortgage. You may even be considering a loan that is based on "Prime". But what is Prime?? In a nutshell, the prime lending rate is the interest banks charge each other for overnight loans. This rate is based in turn on the interest rate the Federal Reserve charges for money it lends to banks. Heres an example from the video. Bank A borrows money from the Federal Reserve, at 1% interest. Bank B borrows from Bank A at 4% interest. (Historically Prime has been about 3% above the Federal rate.) Both Bank A and Bank B recalculate loans "based on Prime" — like Adjustable Rate Mortgages — on that 4% figure. The short-hand term "above Prime" in the world of mortgages is the margin (or spread) added to the Prime rate. An ARM with 2% margin would be 6% (4% + 2%) in the example above. Watch our short video to see this explained visually.

Mortgage insurance is a policy that covers the lender in the case of loss. For some borrowers, the FHA (Federal Housing Authority) provides mortgage insurance. For other borrowers, a policy from a private mortgage insurer (PMI) may a better option. PMI companies usually have larger down-payment requirements and more-stringent qualification guidelines than the FHA. They may also cover loans that are large than the FHAs limits. Premiums from these lenders are often lower than FHA premiums, though. Most lenders will have guidelines and information about PMI options, for situations where mortgage insurance will be required. Ask your lender if PMI is an option for your situation.

The term "mortgage insurance" can be a bit confusing; this video might help. Mortgage insurance covers thelender, not the homebuyer, but mortgage insurance premiums are paid by the homebuyer. Confused? Read on. If a home buyer cant make a large enough down payment, the lender is taking a bigger risk that they might not be repaid. Its a silly example, but if you made a $1 down payment on a $1M dollar house, you wouldnt have a very big reason to stick around if market conditions or personal situations go bad. In general, if the down payment is under 20% of the loan (including that $1 down payment), the lender wants insurance that they will be repaid. So you, the buyer, agree to pay mortgage insurance because the lender is taking a bigger risk. If the borrower cant repay, the lender might foreclose on the property, and file a claim with the mortgage insurer for losses. If mortgage insurance comes up in your loan shopping, ask about FHA programs; there may be options that help you. If you do take a loan that requires mortgage insurance, keep track of your equity. You will probably have the option of dropping mortgage insurance when your equity is high enough.

"Do you want to pay points?" is the kind of mortgage question that leaves many people thinking "I dont even know what that is!" Heres a simple explanation. Points are pre-paid interest. You pay interest now (which is frequently tax-deductible) to lower your long-term rate. "One point" is 1% of the total loan amount. If your lender is willing, ask to compare a loan package with 0 points to options with 1, 2 or more so you can see the short-term and long-term effect. As an example and general guideline, on a 30-year mortgage, your interest rate will go down by about 1/8 (0.125) for each point paid -- 3% interest would drop to 2.75% with 2 points paid. If you plan to stay in the home for a while, points can reduce your monthly payment, while the up-front tax deduction might help with first-year finances. PRO TIP: In some market conditions, negotiating to have the seller pay points may be an option. Talk with your real estate professional and lender.

The month-to-month home mortgage payment primarily pays off principal and interest. Many loan providers likewise consist of regional real estate taxes, homeowners insurance coverage, and home mortgage insurance coverage, if appropriate. If you are re-financing compare what is and isnt consisted of in your funding alternatives. View this video and it should make sense.