Finance
What is the debt-to-income (DTI) ratio used for in mortgage underwriting?
ATo calculate the property's value relative to the loan amount
BTo measure the borrower's monthly debt payments against their gross monthly income✓ Correct
CTo determine the property's insurance premium
DTo calculate the number of points on the loan
Explanation
DTI compares a borrower's total monthly debt payments (including the proposed housing payment) to their gross monthly income. Lenders use it to assess repayment ability.
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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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