18
Mar
By Fred Gruber
Home Buyer Tips

How Debt-to-Income Ratio Affects Your Mortgage Eligibility

When applying for a mortgage, lenders evaluate several factors to determine your loan eligibility. One of the most critical metrics is your Debt-to-Income Ratio (DTI). Understanding how DTI impacts mortgage approval can help you better prepare for homeownership and improve your chances of securing the loan you need.

What is Debt-to-Income Ratio (DTI)?

DTI measures the percentage of your gross monthly income that goes toward monthly debt obligations. Lenders use this ratio to assess your ability to manage additional debt responsibly.

There are two types of DTI:

1. Front-End DTI: Focuses solely on your housing expenses, including mortgage principal, interest, property taxes, homeowners insurance, and any HOA fees.

2. Back-End DTI: Includes all your monthly debt obligations, such as housing costs, auto loans, student loans, credit card payments, personal loans, and child support.

How is DTI Calculated?

To calculate your DTI, use this formula:

DTI = (Total Monthly Debt Payments ÷ Gross Monthly Income) × 100

For example, if your total monthly debt payments amount to $2,000 and your gross monthly income is $6,000, your DTI is 33%.

Why Does DTI Matter in Mortgage Approval?

Lenders use DTI to determine your ability to take on a mortgage while maintaining financial stability. Generally, the lower your DTI, the more favorable your loan terms will be.

Most lenders follow these DTI guidelines:

  • Conventional Loans: Typically require a back-end DTI of 43% or lower, though some lenders may allow up to 50% with strong compensating factors.
  • FHA Loans: Allow DTI ratios up to 57% in certain cases, making them more accessible to borrowers with higher debt.
  • VA Loans: Do not have a strict DTI cap, but 41% or lower is preferred for approval without additional scrutiny.
  • USDA Loans: Generally require a back-end DTI of 41% or lower, but exceptions may apply with strong credit and financial reserves.

How to Improve Your DTI for Mortgage Approval

If your DTI is too high, consider these strategies to improve your financial standing before applying for a mortgage:

  1. Pay Down Existing Debt: Reduce balances on credit cards, auto loans, and personal loans to lower your monthly obligations.
  2. Increase Your Income: Consider a side job, freelance work, or asking for a raise to boost your gross income.
  3. Avoid Taking on New Debt: Delay financing major purchases like a car or furniture until after securing your mortgage.
  4. Refinance High-Interest Debt: Consolidating debt into lower-interest loans can reduce monthly payments and improve your DTI.
  5. Make a Larger Down Payment: A higher down payment can lower your loan amount and monthly mortgage payment, reducing your DTI.

Your DTI plays a crucial role in determining your mortgage eligibility. While a lower DTI increases your chances of approval and better loan terms, exceeding lender limits can pose challenges. Understanding your DTI and taking steps to improve it before applying for a mortgage can position you for success.

If you’re considering buying a home and want guidance on your DTI, give us a call to explore your best options.

17
Mar
By Fred Gruber
Financial Reports

What’s Ahead For Mortgage Rates This Week – March 17th, 2025

The inflation data report released last week showed a surprising result—it was cooler than expected across the board. This has led to a much more positive outlook, even in light of recent events regarding the Trump administration. While consumer sentiment reports from the University of Michigan still showed more dissatisfaction than expected, they were accompanied by largely positive data across various releases. There are strong expectations that there will be no interest rate increases, with some potential for rate cuts this year.

Consumer Price Index

The consumer price index increased a mild 0.2% last month, the government said, breaking a string of elevated inflation readings since November. The rate of inflation in the past 12 months fell to 2.8% from 3.0% in January. It had slowed to as low as 2.4% early last fall before a rebound in inflation toward the end of 2024.

Producer Price Index

The flat reading in the producer-price index — helped by lower energy costs — came in under expectations. Economists polled by the Wall Street Journal had forecast a 0.3% increase. The last time the producer-price index showed so little inflation was in July. The rate of wholesale inflation in the past 12 months, meanwhile, dropped to 3.2% from a one-year high of 3.7% in January.

Consumer Sentiment

The burst of optimism following Donald Trump’s presidential election victory has evaporated. A new survey shows that Americans are worried about rising inflation due to the president’s tariffs and are unsettled by the uncertainty in Washington. According to the University of Michigan, consumer sentiment fell to a 29-month low of 57.6 in March, down from 64.7 in the previous month.

Primary Mortgage Market Survey Index

• 15-Yr FRM rates saw an increase of 0.01% with the current rate at 5.80%
• 30-Yr FRM rates saw an increase of 0.02% with the current rate at 6.65%

MND Rate Index

• 30-Yr FHA rates saw an increase of 0.11% for this week. Current rates at 6.28%
• 30-Yr VA rates saw an increase of 0.10% for this week. Current rates at 6.30%

Jobless Claims

Initial Claims were reported to be 220,000 compared to the expected claims of 225,000. The prior week landed at 220,000.

What’s Ahead

The FOMC is making it’s next rate decision in the upcoming week on Wednesday. There are a number of smaller data releases surrounding the rate decision, but largely all eyes are on the rate decision.

14
Mar
By Fred Gruber
Home Mortgage Tips

APR vs. Interest Rates

If you’re gearing up to dive into the world of real estate, there are a few key terms you’ll want to wrap your head around before taking the plunge. Today, we’re demystifying APR and interest rate, two crucial concepts that can impact your home-buying journey. Don’t worry, I’ll break it down in simple terms so you can confidently navigate the process like a pro.

Interest Rate:

Let’s start with the basics. The interest rate is the percentage charged by a lender for borrowing money to buy your home. It’s essentially the cost of borrowing the principal amount. When you’re comparing loan offers, you’ll often see this prominently displayed. A lower interest rate generally means lower monthly payments, which can be appealing, especially over the long term.

Annual Percentage Rate (APR):

Now, let’s add another layer of complexity with APR. APR includes not only the interest rate but also additional fees and costs associated with securing your mortgage. This could include things like origination fees, points, closing costs, and mortgage insurance premiums. Essentially, APR gives you a more comprehensive picture of the total cost of borrowing over the life of the loan.

So, what’s the big difference when it comes to buying a home?

Interest Rate is like looking at the sticker price of a car. It’s the upfront cost you’ll pay for borrowing money, expressed as a percentage.

APR, on the other hand, is more like the total cost of ownership of that car, including taxes, registration fees, and maintenance costs. It gives you a clearer picture of the overall cost of borrowing by factoring in those additional expenses.

Why does this matter in the context of buying a home?

Well, let’s say you’re comparing two mortgage offers:

·       Option A has a lower interest rate of 3.5%.

·       Option B has a slightly higher interest rate of 3.75%, but it includes points that lower the rate and have lower closing costs overall.

At first glance, Option A might seem like the better deal because of its lower interest rate. However, once you factor in all the additional costs included in the APR, Option B might end up being more affordable in the long run.

Understanding the difference between APR and interest rate empowers you to make informed decisions when comparing mortgage offers. It allows you to see beyond the headline numbers and consider the full financial picture.

So, as you prepare for your home-buying journey, remember to look beyond the interest rate and pay close attention to the APR. It could save you thousands of dollars over the life of your loan and ensure you’re making the best financial decision for your future.