Know your relationship: loan to value and debt to income
If you are considering refinancing a loan or requesting to have your private mortgage insurance (PMI) removed, you need to know your loan-to-value ratio.
It is easy to understand by following these steps:
If you are applying for a loan:
1) Start with the purchase price of the property as the value of the property. (example: $ 150,000)
2) Subtract the amount from your initial payment ($ 20,000).
3) Take the loan amount which will be the purchase price minus the down payment ($ 130,000)
4) Divide the loan amount ($ 130,000) by the purchase price ($ 150,000 = value). It would look like this: $ 130,000 divided by $ 150,000, which equals 0.87, or 87 percent = your proportion.
5) Use this number with your lender when referring to your loan.
Most loans with an LTV greater than 80 percent require PMI.
If you already have a loan:
1) You must obtain an appraisal of your property. This is the only way to get an accurate assessment of its value. If you’re just doing this to keep track of your loan-to-value ratio, you can save your appraisal fee and estimate value by comparing your property to similar homes in your neighborhood that have sold. This will be the value number for the equation
2) Check your most recent loan statement to find out how much you owe (your balance). This will be the loan number of the equation.
3) Divide the loan amount by the value number. This is your ratio.
If you request PMI removal, you will need to obtain an appraisal. When removing the PMI, you can request in writing to your current lender that the PMI be removed if the ratio is 80 percent or less. If you request an appraisal and the value is not high enough, you will still pay for the appraisal.
When you apply for a loan, home loan, or any other type of credit, lenders use your debt-to-income ratio (how much you owe on credit cards and loans compared to how much you earn) to help assess your credit.
How you can calculate your debt-to-income ratio:
1) Add your total net monthly income. This includes your monthly salary and guaranteed overtime, commissions or bonuses; plus alimony payments received, if applicable. If your income varies, find the monthly average for the last two years. Include money earned from any other additional income.
2) Add up your monthly debt. This includes all your credit card bills, loan and mortgage payments. If you rent, be sure to include your rental payments.
3) Divide your total monthly debt by your total monthly income. This is your total debt-to-income ratio.
4) If your index is greater than 0.36, what professionals would call a score of 36. The lower the better. If the score is higher than 36, it could cause an increase in the interest rate or the down payment on a loan that you apply for.
Remember:
When you total your monthly debts, use the minimum payment on your statements.
When calculating your income, a lender generally only considers money from a job you’ve been in for at least two years.
Unreported earned income cannot be used in the calculation.