Know the Ratios in Real Estate Terminology

by Ann Hayward 06/02/2019

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.

Home Loan

Real Estate

Debt To Income Ratio

About the Author

Ann Hayward

Born in Philadelphia and raised in the suburbs, Ann Hayward got her Pennsylvania real estate license at age 18 even before going to college. This second-generation real estate professional followed in the footsteps of her father and two uncles, inheriting their passion for the business. Licensed in DC, Maryland and Virginia, Ann is accomplished in her career, with numerous designations including SFR, SRES, PSA, WHC, and multiunit Housing Development Finance Professional (HDFP) from the National Development Council. She specializes in Prince Georges and Montgomery Counties, Northern Virginia and Washington, DC, all jurisdictions where Ann has lived and knows very well. In addition to her professional expertise, she owns and manages personal investment property, understands and has been involved in the renovation/remodeling process, and has great resources which she shares with clients. When you hire Ann to represent you, she will make your buying or selling experience an enjoyable, rewarding one. Her compassion, sensitivity to her clients’ needs, eye for detail, and ability to see the big picture when guiding you through a purchase or sale are unique assets that will ensure your success. A diverse and relevant background also gives Ann a distinct edge. For 30 years, she worked in fast-paced, high-pressure television and theatrical production, attaining the highest achievement – DGA membership as a Director, and as an award-winning staff and freelance writer. Her keen audio visual skills and design sense benefit sellers in marketing their properties, and are invaluable in helping buyers see the potential of space. A true renaissance woman, Ann was also an income tax professional and office manager for H&R Block, so she thoroughly understands the tax and financial implications of acquiring and selling real estate. Her superior organizational skills are further evidenced as owner of a downsizing/professional organizing business, Managed For You, which allows her to connect with everyone from millennials to boomers and seniors, whether for small space planning or assisting with major decluttering and transitioning. Ann holds an AB in American History from Simmons College, Boston, plus attended Robert Wagner Graduate School of Public Administration where she was a candidate for Doctorate. She additionally studied Film Direction at the American Film Institute in LA, and was a Stanford University post-graduate Professional Journalism Fellow. Personally, Ann is an avid if not very good golfer, and the co-founder of a nonprofit 501c3 organization offering educational guidance, tutoring and counseling for youngsters from elementary school through college admission. She sits on the board of trustees of a nonprofit educational film production corporation as well. (202) 494-6252 [email protected]