Know the Ratios in Real Estate Terminology

by Connie Dunlap 05/19/2019

In real estate terminology, you may hear about various ratios and where you need to fall within the ratio to qualify for the home you want. A ratio simply expresses a relationship between two values: they compare two things, so a student/teacher ratio might be shown as 18:1, or one teacher for every 18 students. Different ratios apply to residential home buyers, investors, sellers, and lenders, but here are a few that might apply to you.

Loan-to-value or LTV

A comparison between the amount of a mortgage loan and either the home’s purchase price (for new buyers) or its appraised value (in a refinance) is its loan-to-value ratio. Lower LTVs typically qualify a buyer or homeowner a lower interest rate because there is less risk of default to the lender. So, a conforming mortgage with 20 percent down often garners a lower rate than an FHA loan with only five percent down.

Higher LTVs place more risk on the lender so if the market drops, the home could be “upside-down” or worth less than the amount of the mortgage.

Debt-to-income ratio or DTI

More important to home buyers is the debt-to-income ratio. Also called a debt-service ratio, it expresses how much money the borrower makes monthly compared to the monthly ongoing debt payments and obligations. A lender uses this figure to determine how high a mortgage payment you can handle. The first number is your income (gross) from your job, plus any other income that can be counted such as child support or a trust disbursement that you can use to make your mortgage payment plus taxes and insurance, and if applicable, association dues.

The second number uses the same calculation as the first plus any long-term debt such as a vehicle or school loan and consumer debt. This amount is the percentage of your income used to pay housing and long-term debt. So, a ratio of 30:37 (also written 30/37) means you spend 30 percent of all your income on housing with no more than seven percent obligated to debt service. That leaves you with 63 percent of your income for food, auto insurance, medical bills, clothing, and other expenses. Qualifying ratios adjust over time, but the Federal Housing Administration lists the qualifying ratio and the formula to determine it to qualify for an FHA loan.

Price-to-income ratio

Your DTI comes from your personal debts and income, and the LTV comes from a specific home's value, but the price-to-income ratio expresses the affordability of housing in a given locale. Most often, it is the ratio of the median home price to the median household disposable income. This ratio helps you determine if the home you want to buy is overpriced (it will be hard to sell) or under-priced (super good deal) for its geographical location. Lenders use this ratio as one additional factor in determining risk for that specific home.

To learn where your ratios fall and to determine if an area is right for your household budget, let your local real estate professional guide you.

About the Author
Author

Connie Dunlap

Personal I am originally from Ohio but please don't hold that against me. :) I moved here with my husband in 1978 and we raised three sons who all graduated from Grosse Pointe South High School with an excellent education. I received a Dental Hygiene certification from Ohio State University and a B.A. degree in psychology from Wayne State University. My current hobbies include spending time with my family, needlework, learning French, and volunteering with the Junior League of Detroit, Operation Smile, and Grosse Pointe Memorial Church. Professional I have been a licensed Realtor since 1987 and an Associate Broker since 1990. I specialize in representing my clients in the purchase and sale of single-family residences and condominiums in the Grosse Pointe communities. I truly love this area and pride myself on my knowledge of current transactions, school districts, neighborhood information, and related services, including mortgage, insurance and inspection information. I am a customer driven Realtor dedicated to achieving results and providing exceptional service. If you are in the market to buy or sell a home, I will put my 31 years of real estate expertise to work for you! Certifications and Recognitions [email protected] certification [email protected] Graduate, [email protected] Institute ABR - Accredited Buyer Representative CRS- Certified Residential Specialist RAM- Real Estate Alumni of Michigan e-PRO- Advanced Training in Technology