Today I am going to explain to you WHAT 3 NUMBERS MATTER THE MOST ON HOME LOAN APPLICATIONS.
The 3 numbers that matter are YOUR CREDIT SCORE, YOUR DEBT-TO-INCOME RATIO AND YOUR LOAN-TO-VALUE RATIO.
These specific numbers matter because they affect your ability to qualify for a home loan as well as your interest rate for the loan.
1. Credit Score
You’re probably already familiar with this one. A credit score is a three-digit number, typically between 300-850, that measures a person’s borrowing history. There are three main credit bureaus (Equifax, Experian and TransUnion) that each calculate their own credit score for you based on your payment history, how much debt you have, your credit limit usage, etc.
It matters because your credit score helps mortgage lenders evaluate your likelihood of paying back your loan.
Bottom Line: The Higher the score, the lower the rate and the lower the monthly mortgage insurance premium and vice versa.
2. Loan-to-value ratio (LTV)
Your loan-to-value ratio, or “LTV”, is a way to measure how much equity you have in your home. One way to think of LTV is the percent you still need to put towards the principal in order to fully own your home. The higher your LTV, the more you’re borrowing from your lender.
As an example, on a $100,000 home, a loan of $90,000 is 90% loan to value. To calculate, you divide the loan amount by the purchase price or appraised value if it is a refinance.
Why should you care?
For a home purchase, lenders often have a maximum LTV (i.e. down payment minimum). Your exact LTV maximum depends on things like your property type, your loan amount, whether or not you’re a first-time homebuyer, how you’ll be using the property, etc.
If you have a LTV over 80%, you will have mortgage insurance.
For a home refinance, your LTV is important if you’re looking to do a cash-out refinance or get rid of mortgage insurance.
The LTV also affects your interest rate…especially on refinances. The lower the loan to value, the lower the interest rate – typically.
3. Debt-to-income ratio (DTI)
Your debt to income ratio – “DTI” helps lenders understand how much you can afford to pay for a mortgage each month given your existing monthly debt payments. Lenders add up what your monthly debt will be once you have your new home (e.g. any monthly payments for student loans, car loans, credit card bills, etc. plus your future mortgage payment) and divide it by your gross monthly income (i.e. how much money you earn before taxes).
Why should you care?
Lenders set DTI limits for their borrowers to make sure that you can comfortably afford your mortgage currently and in the future.
If your DTI is higher than the limit for your circumstances, you may not be able to qualify for that mortgage. In fact, a high DTI is the #1 reason mortgage applications get rejected.1
Most lenders typically offer loans to creditworthy borrowers with DTIs as high as 50%. Debt to income ratio also affects your monthly mortgage insurance premiums on most loans too! So the higher the debt to income ratio, the higher the risk…so they are going to charge you more monthly for that risk.
And the lower your DTI, the easier it may be to qualify for a mortgage.
So there you go! I hope that I have taught you a little something! Thank you so much for watching! If you are still shopping for a home loan, would like to apply online, need more information or, would like to reach me, you can go to my website at SALending.com.
Thank you and God Bless~