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.

"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.

Many people buying a home and shopping mortgages will eventually face the decision: "fixed or ARM?" Its a risk-vs-cost decision. Heres some perspective about fixed-rate options. 15-year Terms are the shortest of the commonly-available fixed rate plans. Interest rates are usually lower for 15-year loans. Payments reduce loan principal earlier, so you build equity (ownership) faster. And, of course, the loan is paid off earlier. 30-year Terms are the longest terms allowed, and probably the most common. For perspective, though, keep in mind that for most 30-year loans, the first 23 years of payments pay off more interest than principal. This may mean larger tax deductions, but it also means more interest paid. Keep your plans for living in mind; how long will you be in this home? What payments make financial sense? Look at the short-term and long-term math for eligible loan amounts, interest rates and payments to make the best decision for your situation.

This short video summarizes the main kinds of mortgages available for home buyers: Adjustable Rate Mortgage, commonly called “ARM” Fixed-Rate Mortgages Balloon Mortgages 2-Step Mortgages ARMs, as the name suggests, will change over time. As market interest rates vary, the mortgage interest rates and payments will vary with them. Buyers opting for ARM loans take on responsibility for meeting payments even if interest rates go up significantly. Fixed rate mortgages lock in interest rates for the entire loan. If the interest rate on a fixed-rate loan is higher than an ARM today, the rate and payments will not change in the years to come. Balloon mortgages are sort of “shaped like a balloon” — smaller at the bottom, bigger at the top. In financial terms, balloon mortgages provider lower interest rates for the early years of a loan — usually 5 years, 7 years, or 10 years. Then the balance and interest are adjusted and refinanced, which sometimes requires a large ‘balloon’ payment. Two-Step mortgages are like super-simplified ARMs. Interest rates adjust, but only one time. Other options for mortgages are available, and worth investigating for your particular situation. For veterans, VA loans are a frequently a great option; see the VA loan series on this site for additional details. Other government programs for non-veterans may also be available. Real estate professionals and lenders can help you make sense of the current market and the options that might suit you best.

Buying your first home? Many lenders provide affordable mortgage options specifically designed to help first-time buyers. Home purchase is a big and often difficult step; these programs may help. If any of these apply: You have long-term debts You have, or have had, income irregularities Your credit history notes past challenges You have not accumulated enough for closing and down payments First-time buyer programs may be able to help. Talk to lenders early.

Federal regulations for mortgage loans require lenders to assess a home-buyer’s likelihood of paying back the loan over the years ahead. As a result, lenders are required to ask about a borrower’s current financial situation and financial history. Lender questions will cover employment, expenses, assets, income and of course credit history and credit rating. The key thing for the prospective home-buyer to understand is that lenders have to ask these questions and make this assessment. These ability-to-repay rules are built into loans that meet Qualified Mortgage guidelines. If you are shopping and comparing loans, keep track of which options are meet the guidelines to be Qualified.

Picture your home loan on one side of a see-saw, and the home itself on the other. Thats a simplified version of LTV — "Loan to Value". Its one of the key ratios involved in setting loan amounts. Lenders frequently set LTV limits. If you know the ratio, you know the upper boundary of loan size, like this: "LTV on this $500K home is 80%." 80% x $500K = $400K max loan. Buyer would need at least $100K down for that loan. LTV also measures equity. If you put $100K down for the example above, you have $100K equity in the home. As a result, higher-LTV loans may require mortgage insurance. With an LTV greater than 80%, the risk of default is high because the homeowner has a lower "stake" in paying off the mortgage.

Laws to provide stable, suitable home financing created a category of loans and lending practices called "Qualified Mortgages." They provide guidance to help lenders provide loans that borrowers can repay successfully. Following the guidance and practices — and assessing each borrowers ability to repay—gives lenders additional legal protection. The Qualified Mortgage guidelines provide predictable and more-easily-understood loan features. They also rule out some loan terms and practices. Qualified mortgages cannot be: Interest-only loans Loans with terms >30 years "Negative Amortization" loans (increasing principal over time) Most forms of "balloon" loans with large payment partway into the loan period. These consistent practices help lenders and regulators provide consumers with objective guidance about reasonable debt. If you are buying a home, ask about your Qualified Mortgage options.

The Loan Estimate form helps you compare different loans; Page 3 of the form summarizes the key figures. Cost-over-time figures ("In ___ Years") chart out the total amount paid, and the amount applied against loan principal. This ratio usually changes over time. Annual Percentage Rate - APR - gives you the ratio of interest PLUS any applicable fees for a complete percentage cost, per year. Total Interest Percentage - TIP - shows interest over the life of the loan, in relation to the loan amount. For example, a $500K loan with a TIP of 20% indicates that you would pay $600K (20% of $500K = $100K) in total.

Lenders are required to store transaction records for a number of years. The period differs based on the documents. Escrow Cancellation: 2 years Partial Payment Policy Disclosures: 2 years Loan Estimates: 3 years after loan consummation Closing Disclosures: 5 years after loan consummation If the loan is sold — for example, to a different company for loan servicing — the original lender is only required to provide a copy of the Closing Disclosure to the new owner. Both companies must retain this information, for the remainder of the 5-year period. While digital record storage is common, it is not legally required. The guidelines set for lenders under the TRID regulations do not affect consumer behavior; consumers can keep disclosure records as long as they see fit. .