Ratios
The
underwriter
looks at two specific ratios
when evaluating your credit risk — the loan-to-value ratio
(LTV) and your debt-to-income ratio.
The LTV ratio is the amount of your
mortgage
as a percentage of the value of your home. For example, if you
have a $100,000 mortgage on a house you buy for $110,000, your
loan-to-value ratio is 91%. The higher the ratio, the more risk
the lender is taking. You can lower the ratio — and may
improve your ability to borrow — by making a bigger down
payment, which increases your
equity
in the home. From a lender’s
perspective, the more equity you have, the less likely you are
to default on a loan.
Your debt-to-income ratio, or the amount
you owe as a percentage of the amount you earn, gives the lender
an idea of how much more
debt
you can handle. You can calculate
your ratio by dividing your total monthly debt (including monthly
mortgage payments), credit card payments, car payments, and all
other regular monthly bills, by your gross monthly income, including
your salary, interest earnings, tips, and any alimony or child
support payments you receive.
For example, if you have $2,000 in monthly
debt, including new mortgage payments, and you earn $5,000 a month,
you have a debt-to-income ratio of 40%, slightly higher than the
standard — 36% — for winning approval of your application.
The higher your ratio, the more risk lenders take on when providing
you a loan. |
Dwight
P. Robinson, Senior Vice President, Corporate Relations, 
