One of the criteria used by lenders to determine if you qualify for home financing is your debt-to-income (DTI) ratio. This formula helps lenders determine if you have the capacity to meet your monthly debt obligations, including the expense associated with your home.
There are multiple components of your total monthly housing expense that a lender will consider when calculating your DTI. These include not only the principal and interest payments that you will make each month but also your property taxes and homeowners insurance. For some borrowers, the total monthly housing expense will also include mortgage insurance, flood insurance and homeowners’ association (HOA) or condo dues.
What You Need to Know
Principal and Interest (P&I):
P&I are the main components of your monthly mortgage payment. Principal is the amount borrowed that has to be paid back to the lender. Interest is what the lender charges for lending the borrower money.
Real Estate or Property Tax:
Real Estate (aka Property Tax) is a tax assessed on real estate. The tax is based on the value of the subject property and is assessed by your local municipality.
Insurance coverage available for owner-occupied properties to protect against personal liability and physical property damages for a dwelling and its contents.
Lenders will require that borrowers secure mortgage insurance with down payments less than 20% for one-unit primary residences. This insurance protects the lender in the event of a loan default, but the monthly premiums are paid by the borrower. There are also options whereby the lender will pay the mortgage insurance premium on behalf of the borrower, however this will result in a higher interest rate on the loan.
- Flood insurance compensates for physical property damages resulting from flooding. It is required in federally designated Special Flood Hazard Areas. The lender will conduct a flood certification during underwriting to determine whether the subject property is in a designated flood zone.
Homeowners Association (HOA) Dues:
- An HOA is an entity formed to manage the day-to-day operation and long term interests of residential dwelling communities, including condo, co-op, and PUD projects. The HOA is typically created and vested with specific roles, responsibilities, and rights by the project’s legal documents in compliance with applicable laws.
- HOA dues are the fees that must be paid monthly by owners of properties in the residential lending dwelling community to the HOA for maintaining and improving properties in the dwelling community.