There are many variables taken into account when calculating mortgage rates. Some of these variables are based on the economy and real estate trends. However, there are two particular terms that are based solely on your personal finances, Loan-to-Value and Debt-to-Income.
Before you apply for a mortgage, make sure to be armed with your credit score, LTV, and DTI. Below, we’ll show you how to calculate these two numbers easily:
LTV:
When you breakdown this term, loan refers to the amount being borrowed and value refers to how much the property is selling for. In order to calculate the ratio, you would use the loan amount and selling price to determine the percentage of the payment that is being covered through the mortgage.
Example: Selling price = $300,000, Down payment = $60,000, Loan amount $240,000
In this example, the loan amount is 80% of the selling amount. It is ideal to make a down payment of at least 20% percent of the total cost. Generally, the lower the percentage of the payment being covered through a loan, the lower interest rate you will qualify for since you have more equity in your home and are seen as less likely to default.
DTI:
This term is exactly as it sounds, it compares the amount of revolving debt you have to your monthly income. Debt refers only to money you owe other organizations, including car loans, student loans, credit cards, and mortgage. The debt does not include monthly expenses such as utilities, auto insurance, health insurance, etc.
To calculate:
Add the minimum monthly payments of all your debts, including the mortgage with taxes, homeowners association fees, insurance.
Take that number and divide it by your gross monthly income.
The outcome will be the DTI percentage.
Ultimately, there are many individual numbers and variables that are taken into account while a mortgage is being drafted. The most advisable thing to do is be prepared knowing exactly what is within your budget and what your finances will reflect. If you’re ready to start financing your custom home, we can direct you to local trusted brokers. Our team at Landmark Custom Homes has you covered every step of the way.
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