Understanding Debt-to-Income Ratio for Mortgages, Part 2

debt-to-income ratio mortgages

In part one of this two-part blog series, we went over some of the basics associated with debt-to-income ratio during a mortgage application. Abbreviated DTI, this ratio helps lenders understand how much of your monthly income is going toward paying down debts, a big factor they use to assess your overall creditworthiness and the kinds of loans to approve you for.

At Altius Mortgage and our partners at Mortgage Ogden, we’ll happily detail our DTI investigation process for any of our clients, from first-time homebuyers to experienced real estate flippers and everyone in between. Today’s part two will dig into how mortgage debts compare to other types, which debt types are “good” or “bad” for DTI areas, and how you can lower your DTI ratio leading up to a mortgage application.

Mortgage Debts

We went over some various loan types in part one – how do mortgages compare to these when it comes to debt and how it’s considered?

Broadly speaking, mortgages are secured loans, with the home and property being purchased serving as the collateral used. Mortgages tend to come with lower interest rates over a long period of time. Lenders use DTI ratio not only to determine whether you qualify for a given mortgage, but also to define the limit on how much you can borrow given your finances.

Good Vs. Bad Debts for DTI

As we noted in part one, while there are general ranges lenders want to see a DTI ratio come in under (40% or 36% in most cases), there may be some wiggle room here depending on whether your debt is primarily of the “good” or “bad” variety. Lenders consider good debt to be the kind that helps increase net worth or generate income, while bad debt is used to purchase depreciating assets of some kind.

Here are some examples of each:

  • Good debts: Areas like mortgages (provide a living space, plus real estate tends to appreciate in value over time), student loans (provide an education that increases earning potential) or small business loans (help to start and grow a business) are considered good debts, and lenders may be more forgiving on them.
  • Bad debts: Personal loans (small loans with huge fees and interest rates), car loans (cars depreciate over time) and credit card loans (usually have very high interest rates and fast repayment schedules) are generally considered bad debt.

Tips for Lowering DTI Ratio

If you’re thinking of applying for a mortgage in the near future and are worried your DTI ratio is too high, here are some basic tips for lowering it:

  • Avoid any big purchases on credit for the time being
  • Do everything you can to repay current debts as much as possible
  • Do not take on new debt accounts or debt types

For more on debt-to-income ratio and its role in mortgage applications, or to learn about any of our home loan products, speak to the staff at Altius Mortgage today.

Understanding Debt-to-Income Ratio for Mortgages, Part 1

debt-to-income ratio mortgages

There are several factors that will be assessed by mortgage lenders when you apply for a home loan, and one such factor that’s very important in nearly all cases is your level of outstanding debt. Lenders want to know that you have the ability to pay back the money borrowed in any mortgage, and one of the top methods they’ll use to determine this is comparing your level of debt with your current income to get an idea of your broad financial picture.

At Altius Mortgage and our partners at Mortgage Ogden, we’re happy to walk you through all the details you need to know here for any of our mortgage loans. The most common debt-related metric, as we just noted, relates to your income and is known simply as debt-to-income ratio (DTI) – this two-part blog will go over everything you need to know about this metric, including the kinds of debt and how they play a role, plus how you can get your DTI ratio in the optimal place before applying for a mortgage.

Debt-to-Income Ratio Basics

As the name suggests, debt-to-income ratio refers to a comparison between your total debt and your gross income. It’s generally calculated on a monthly basis, with lenders dividing your monthly debt requirements by your monthly gross income to come up with a single figure, represented in a percentage format.

Generally speaking, lenders are looking for a DTI number of 40% or under, preferably under 36% in most cases. However, another factor involved here is the type of debt taken on, of which there are several. Our next couple sections will go over these types of debt and the roles they play in this equation.

Secured Vs. Unsecured Debt

For starters, there could be a big different in how a lender views your DTI ratio depending on whether the majority of your debt is secured or unsecured. Secured debt is any that uses collateral for the loan, such as a car loan where the lender technically claims ownership on the vehicle if the borrower does not pay back the loan properly.

Unsecured debt, then, refers to debt that required no collateral. Rather, lenders offer the loan based on your word and financial ability, plus a signed agreement. Unsecured loans tend to come with higher interest rates. Generally, secured debt is considered a more robust form of debt than unsecured, and you might be able to get away with a higher DTI ratio if most of your debt is secured.

Revolving Debt

In other cases, revolving debt refers to a loan where the consumer pays a commitment fee to a lender to borrow money on an as-needed basis. On a timeline agreed upon beforehand, the borrower can take certain amounts every so often. These loans are often used by those who have a variety of unexpected expenses in their lives, offering convenience that does often come with a higher interest rate in some cases. Home equity loans and personal lines of credit often qualify as revolving debt.

For more on DTI ratio and other important factors in a mortgage application, speak to the staff at Altius Mortgage today.

Various Insurance Formats Associated With Mortgages, Part 2

insurance formats associated mortgages

In part one of this two-part blog, we discussed both homeowner’s insurance and title insurance for new homebuyers. These insurance formats are designed with the homeowner’s protection in mind, helping them stay covered in case of certain incidents or issues.

At Altius Mortgage and our partners at Mortgage Ogden, we’re happy to explain any insurance coverages related to our mortgage loans. Another insurance type, but one that is actually meant to protect the lender in certain situations, is known as private mortgage insurance, or PMI. Let’s go over why PMI exists and when you might have to pay it, plus the formats that are commonly used.

Private Mortgage Insurance Basics and Purpose

In many loan types, including conventional mortgages that are still highly common, lenders will be looking for a certain down payment threshold. While the most popular number here is 20% of the total purchase price of the home, this may vary based on your lender and the loan program you’re entering.

In cases where you cannot meet the required threshold for your down payment, PMI is often used as a substitute. Instead of paying those costs up front in the form of a down payment, you take out a private mortgage insurance policy from a private company – the benefits of which will actually be paid to your lender. This is to cover them in case you default on your payments or some other issue crops up, and is essentially a way of allowing a greater number of homebuyers to consider certain mortgage types even if they don’t have a single lump sum available for the down payment.

PMI Payment Formats

PMI can be paid in a few different ways, and this will depend on your lender. The general choices available include the following:

  • Monthly premium: Your PMI payment is simply added to your monthly mortgage payment, with the premium showing up on your loan estimate and closing disclosure sections. It will be present in your Projected Payments section as well. This is the most common format for paying PMI.
  • Single up-front premium: This is similar to a down payment but different in a few detailed ways, and involves a single payment at the time of closing.
  • Hybrid: In other cases, you may pay a smaller up-front premium, then continue with monthly premiums from there.

One other vital note to be aware of: PMI is not a condition that will remain for the entirety of the loan. When you have paid down your mortgage to a point where the balance is at 80% or lower of the original value, you can request to have PMI removed by your lender. When you reach 78% for your balance, PMI should be automatically cancelled.

For more on private mortgage insurance or other important mortgage-related insurance types, or to learn about any of our home loan services, speak to the staff at Altius Mortgage today.

Various Insurance Formats Associated With Mortgages, Part 1

insurance formats associated mortgages

Like with many other major purchase types, it’s important to think about insurance when you’re buying a home. In fact, when it comes to mortgages and homebuying, there are several forms of insurance to think about.

At Altius Mortgage and our partners at Mortgage Ogden, we’re happy to explain all the ins and outs of the various insurance coverage formats that may be associated with your home loan, your home itself or related areas. In this two-part blog, we’ll first go over two coverage types that are meant specifically for borrowers and homeowners; in part two, we’ll dig into private mortgage insurance, which is a bit different.

Homeowner’s Insurance Coverage

For new homeowners, homeowner’s insurance is used to protect the home and any other structures present on the property you’ve purchased. It covers each of the following areas:

  • Damage or loss to structures: Whether due to fire, major weather events or other forms of damage, homeowner’s insurance covers you in case your home or any other structure on the property is damaged or lost. Many insurance policies will even extend to covering damage based on burglary or vandalism, though it’s possible cheaper policies will not – be sure to check on this in advance before signing up.
  • Loss of use: In cases where damage renders your home temporarily unlivable due to repair needs, homeowner’s insurance will offer cover some or all of the expenses associated with this, from the repairs themselves to a hotel stay.
  • Personal property: In addition to your structures, homeowner’s insurance also covers personal items within the home. However, it’s vital to note that you have to have enough insurance to cover certain valuables – lower-value policies may not.
  • Liability: If anyone is hurt on your property and attempts to sue you for damages, homeowner’s insurance also covers medical and legal expenses.

How Title Insurance Differs

Title insurance, on the other hand, is to protect your ownership of the new property you’ve purchased. Sadly, there are unscrupulous folks within the mortgage world who may attempt to scam you in a few ways, one of which involves obtaining the title to your property and then either selling it without your knowledge or trying to buy another property with your information.

Title insurance, however, protects you from these attempts. If you are indeed the victim of a scam, it will cover all your legal expenses and ensure your title remains in the proper hands. Along with ensuring your lender checks for liens on the property in advance of purchase, title insurance is the best way to confirm that all ownership areas will be robust and permanent.

For more on various insurance formats associated with mortgages and homebuying, or to learn about any of our mortgage rates or services, speak to the staff at Altius Mortgage today.