Getting a handle on the terminology, acronyms, and abbreviations in the world of mortgages can be a bit overwhelming. But understanding basic mortgage lingo is important in helping you make informed, confident decisions throughout the lending process. 
Let’s take a closer look at two of the terms you’re sure to hear — debt-to-income (DTI) and loan-to-value (LTV). 

Debt-to-income ratio
Your DTI is one way lenders measure your ability to manage your monthly mortgage payments. 
Bryan Clark, senior vice president of mortgage banking for Dart Bank, says there are two different DTI ratios considered in the underwriting process. 

“The front-end ratio compares your total housing expense to your monthly income, and the back-end ratio is your monthly debt payments compared to your gross monthly income,” he said. “While lenders look at both numbers, when you hear the term DTI, it most commonly refers to the back-end number.” 

As Clark mentioned, to calculate your back-end DTI, your monthly debt payments are added together and the sum is divided by your gross monthly income, which is the amount of money you earn before taxes and other deductions are taken out.  

The Consumer Financial Protection Bureau (CFPB) provides the following example: 
If you pay $1500 a month for your mortgage and another $100 a month for an auto loan and $400 a month for the rest of your debts, your monthly debt payments are $2,000 ($1500 + $100 + $400 = $2,000). If your gross monthly income is $6,000, then your debt-to-income ratio is 33 percent ($2,000/$6,000=33 percent). 

The lower the DTI ratio, the more attractive you are as a borrower. That’s because homebuyers with higher ratios — those with more debt in relation to their income — are generally considered more likely to have trouble making their mortgage payments.

While there are a lot of “preferred” or “required” numbers floating around, DTI is just one factor in the underwriting process. Clark says the allowed ratio can vary by lender and loan program, and it also depends on the rest of the buyer’s financial picture. 

“Someone with a larger down payment or a great credit score may be able to get approved with a higher DTI,” he said. “For instance, it used to be that your front-end ratio couldn’t be more than 36 percent, but that’s not necessarily true anymore. I have seen front-end ratios much higher than that get approved, and I have seen borrowers with much lower ratios be denied. The decisions are unique to each specific borrower.” 

There are basically two ways to lower your DTI — reduce your monthly debt and/or increase your gross monthly income. Using the numbers mentioned above, if the debt amount is reduced from $2,000 to $1,500, the DTI would decrease from 33 percent to 25 percent. If the debt remains the same, but the income increases to $8,000, the DTI will again drop to 25 percent. 

Loan-to-value ratio 

The LTV ratio is another assessment of lending risk that financial institutions examine before approving a mortgage. This ratio compares the amount of your loan with the appraised value of the property. The higher your down payment, the lower your LTV ratio.
For example, if you buy a home for its appraised value of $100,000, and make a $10,000 down payment, you will borrow $90,000. This results in an LTV ratio of 90 percent (90,000/100,000=90 percent).

LTV is a determining factor in buying a home, refinancing a current mortgage, or borrowing against equity within a property. Typically, the higher the LTV ratio, the riskier the borrower appears to the lender. A higher LTV does not necessarily exclude a borrower from being approved, but the interest rate may be higher than it would be for borrowers with a lower number. And, if your LTV ratio is higher than 80 percent, you’ll likely be required to purchase private mortgage insurance (PMI). 

Again, Clark says this ratio is another piece of that financial puzzle and he encourages potential borrowers to speak with a professional, local lender before making any assumptions about their ability to qualify. 

“Sometimes people underestimate what they’re able to qualify for, and with rates being so low right now, it may open up some opportunities for new buyers,” he said. “Even if you aren’t ready to buy now, consider setting up a consultation with a lender who will look at your financial profile and provide suggestions on how to improve your position for a future purchase.” 

For a list of local, reputable lenders, visit the Greater Lansing Association of REALTORS® website at www.lansing-realestate.com.