Mortgage terms, explained
Debt-to-income ratio (DTI)
Debt-to-income ratio, or DTI, compares monthly debt obligations with the monthly income the lender accepts for qualification. It is usually expressed as a percentage. The calculation includes the proposed housing payment and other counted debts. It helps evaluate repayment capacity, but it does not describe every expense in your household budget.
Loan-to-value ratio (LTV)
Loan-to-value ratio, or LTV, compares a mortgage amount with the property value used for that loan. Divide the loan amount by the applicable value and express the result as a percentage. LTV helps the lender assess the financing, but the accepted value, loan purpose and program rules affect the calculation.
Combined loan-to-value ratio (CLTV)
Combined loan-to-value, or CLTV, considers the first mortgage together with other mortgage debt secured by the same property. It compares those amounts with the applicable property value. LTV looks at the first mortgage alone. A HELOC can also require a separate HCLTV calculation that considers its full credit limit.
Prepaid mortgage expenses
Prepaids are expenses collected at closing in advance of the first scheduled mortgage payment. They can include homeowners insurance premiums, prepaid interest and applicable taxes or mortgage insurance. They are different from lender origination charges and from the initial escrow deposit, although all can affect the cash needed to close.
Mortgage reserves
Mortgage reserves are eligible assets available after you pay the funds needed to close. Lenders may measure them in months of the qualifying housing payment. They are not an extra fee paid to the lender. Required amounts and acceptable assets depend on the loan, property and full application review.
