When applying for mortgages, there are so many new and strange terms that it is easy to get lost in the vocabulary. It is always good to do a little research on your own of terms that seem unfamiliar or confusing. But, also remember that you can always ask your lender or loan officer to define these terms. Some terms that may seem unusual and strange to you are front end and back end ratios.

Front end ratios are ratios that show what portion of your income will be made in monthly mortgage payments. They include the principal, interest, taxes and insurance which is sometimes referred to as the PITI. This can be calculated by taking your annual income and dividing it by twelve (for the twelve months of the year). You then take your monthly house payments and divide it by your monthly income. This will give you a percentage.

This percentage will be your front end mortgage. For example, if your annual income is $60,000 we would divide that by twelve to get your monthly income of $5000. If we know that your front end ratio is 31% we can then multiply the two numbers to find that your monthly mortgage payments would be $1550. Most lenders would like this ratio to be 28% or lower but it does depend on the lender.

Back end ratios deal with your total debt payments every month.It is also known as your debt-to-income ratio. This includes mortgage payments, credit card debt, car payments, child support and other loan payments. The back end ratio can also be determined very easily. After adding up your entire monthly debt payments you then divide the sum by your monthly income. That number is then multiplied by 100 to give you a percentage or your back end ratio. Now let’s plug in some real numbers to see how it works.

If we use your monthly income of $5000 and say that your monthly debt payments is $2000 then it is simple to find your back end ratio. We would divide $2000 by $5000 and then multiply the 0.40 by 100 giving us 41%. Now keep in mind that again most lenders do not want this ration to exceed 36% but it does depend on the lender. It mainly depends on what area of the country you live and what the cost of living is for that area.

The reason that your lenders will be very interested in the front end and back end ratios is because they want to make sure that you do not default the loan. By not exceeding the 28% or 36%, you should have no worries and be able to make your payments with ease. If you have any concerns about having a front end or back end ratio being too high, talk to your loan officer about it.

It may just need to be put off for a few months until that ratio can be lowered a bit by paying off a credit card or eliminate other forms of debt. Just make sure you have an open attitude when it comes to determining these ratios.

Typical Advice Given to Middle Age People

This is a difficult and a very personalized question that if possible can be reviewed with a financial planner that will help them save thousands of dollars over time on their mortgage. With these savings they can sit down and discuss where to allocate those investments.

Not only are they increasing liquidity, safety, rate of return and tax deductions, but they are also planning for retirement and reaching the freedom point sooner where their assets have exceeded their liabilities.

Before applying for a mortgage you should work on eliminating a good majority of consumer debt to lower your debt-to-income ratio, improve your credit score, and increase your cash flow.

If you saved enough to put down a large down payment, let’s say 20 percent, you should first check how much you could afford in monthly payments. The reason behind this is to leverage and keep funds liquid for other purposes.

Remember there is no rate of return in equity. Therefore, the least amount you put as a down payment the higher the rate of return will be.

Usually it is good advise to tell clients never to put a big down payment if they can afford a higher loan amount. Financial planners tell them that keeping money liquid is critical in case an emergency should arise that will prevent them from working.

Also, it is a good idea to always have six months of salary in a liquid savings account or asset accumulation account to withdrawal at any time without having to refinance

Typical Advice Given To Young Couples

The amount you need for a down payment varies depending on how much money you have to contribute and the type of financing you obtain. Some lenders want you to put down 20 percent or you may qualify for 0 percent financing, requiring you to cover only closing costs and incidentals.

Five percent down is usually the minimum many lenders will accept. Don’t’ have that much? You could borrow that money from someone, but that means more money to pay back and you pay interest on that also.

If you don’t put down a minimum down payment, the lender considers it a risk to give you a loan, but they will if you will pay for your own insurance.

Typical Advice Given To Those Without Money To Put Down

Should you get a zero percent down loan just because you can? Here are the reasons to think twice about getting a 0 percent down loan:

You are more likely to lose your home because you didn’t have the financial discipline to save or are not making enough money for your home. The less you put down, the higher your monthly payments will be making the entire matter worse.

If you put nothing down that means you will have to settle with a smaller home and soon out growing it. Also, it will be more difficult to find lenders because of the risk they will be taking on.

In the end it is a personal choice and the money that you have saved. If I had it all, I would put a large amount down to have a smaller monthly payment and qualify to receive a lower interest rate. Therefore, be able to put more into personal savings monthly and reach my goals by keeping my funds liquid and plan for a richer retirement.

That’s a perfect dream for many, many of us!

DTI: Debt-to-Income Ratio

The dictionary meaning is: the ratio of a borrower’s total of debt as a percentage of their total gross income. In this particular article we will be using this term and referring to it as an example relating to mortgages. However, it can be used for almost any loan.

Your debt-to-income ratio is a simple way of showing what percentage of your income is available for a mortgage payment after all other continuing obligations are met; or, the relationship between what you owe and what you make.

Debt is a problem that plagues many of us today. If unmonitored, your debt can grow at an alarming rate and the next thing you know your finances are in shambles. If you want to identify your overall financial situation and keep your debt in check, you need to establish your debt-to-income ratio.

How To Calculate Your Ratio

You will usually see conventional loan debt limits referred to as the 28/36 qualifying ratio (or other numbers up to 36/42 depending on the type of loan). These numbers refer to two percentages that are used to examine two areas of your debt load.

The first number indicates the maximum percentage of your monthly gross income that the lender will allow for housing expenses. This includes loan principal, interest, private mortgage insurance, hazard insurance and property taxes.

The second number refers to the maximum percentage of your monthly gross income the lender allows for your housing, credit cards, car loans and other obligations that will not be paid off within a short period of time (6-10 months).

Items such as monthly food bills, utility bills and entertainment expenses should not be considered when calculating your debt-to-income ratio. These expenses can be paid off monthly.

To calculate your ratio, take your monthly debt payment and divide it by your monthly take home income. The end result is your debt-to-income ratio. Let’s look at an easy example:

Monthly income: $4,000

Monthly debt payment: $1,850

Debt-to-income ratio: $1,850 / $4,000 = 46%

If you have a ratio of 10 percent or less, it means you have a GREAT debt-to-income ratio, meaning your income is quite a bit more than what you owe. However, if you have a debt-to-income ratio of 55 percent or higher, it means you have too much debt and are considered a risk for a mortgage loan.

Debt-to-Income Ratio and Lenders

Lenders calculate and analyze your ratio to determine the size of mortgage you can afford. In fact, these numbers are frequently the most important numbers that lenders look at when quoting you a mortgage amount and interest rate.

These numbers not only determine if you qualify for a mortgage loan, but the monthly payment you will be paying and for how many years. These numbers tell the lender a lot about a person and how they handle their money.

So in the end, the best thing to do is to keep your debt under control and not to take on too much. It could hinder your ability to qualify for your dream home and if not, it would send your finances plummeting.