Finance
What is the debt-to-income (DTI) ratio used for in mortgage lending?
ATo calculate the loan interest rate
BTo assess the borrower's ability to manage monthly payments relative to gross monthly income✓ Correct
CTo determine the down payment amount
DTo set the loan term
Explanation
DTI ratio compares monthly debt payments to gross monthly income. Front-end DTI covers housing costs; back-end DTI includes all debts.
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Key Terms to Know
Debt-to-Income Ratio (DTI)
A lender's measure of a borrower's monthly debt obligations relative to their gross monthly income, used to evaluate loan eligibility.
Loan-to-Value Ratio (LTV)The ratio of a mortgage loan amount to the appraised value or purchase price of a property, expressed as a percentage.
Discount PointsPrepaid interest paid to a lender at closing to reduce the mortgage interest rate, with each point equal to 1% of the loan amount.
Private Mortgage Insurance (PMI)Insurance required by lenders on conventional loans with less than 20% down payment, protecting the lender — not the borrower — against default.
Math Concepts
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