Debt-to-Income Ratio [Calculating Your DTI]

If you’ve been shopping around for a mortgage, then you’ve probably run into the term “debt-to-income ratio”. This can be a confusing term for someone with limited knowledge when it comes to finance. But, when you apply for a major loan, your debt-to-income ratio can have a significant impact on whether or not a lender approves your application. 

So knowing what a debt-to-income ratio is, and how to calculate it, is essential if you plan on taking out a mortgage or any other major loans in the near future. In this article, we’ll cover the following questions and topics: 

  1. What is a Debt-to-Income Ratio? 
  2. How to Calculate Your Debt-to-Income Ratio 
  3. What is an Ideal Debt-to-Income Ratio? 
  4. What is the 43% Rule? 
  5. Does Your DTI Ratio Impact Your Credit? 
  6. How to Improve Your DTI Ratio 

What is a Debt-to-Income Ratio? 

A debt-to-income ratio, or DTI ratio, is a metric that measures an individual’s gross monthly income against their total monthly debt payments. What your DTI ratio ultimately represents is the percentage of your monthly income that is used to pay off your outstanding debts. 

This ratio is commonly used by lenders to evaluate potential borrowers, determine whether or not they’re able to take on additional debt, and assess the likelihood that they will be able to repay a loan. While a low DTI ratio indicates that you have been able to manage a healthy balance between debt and income, a high DTI ratio indicates the opposite—namely, that you owe a high amount of debt relative to your income, likely aren’t able to save much money each month, and are essentially living paycheck to paycheck

What Factors Make Up Your DTI Ratio? 

The sum of your monthly debt payments includes credit card payments, your mortgage, child support, alimony, and any other loans you may have taken out. However, some recurring monthly payments aren’t included in your DTI ratio. According to, you shouldn’t factor in non-debt payments such as:

  • Insurance premiums
  • Phone bill
  • Childcare expenses 
  • Home utilities, such as your electric, heating, water, sewer, and trash bills 
  • Gym membership 
  • Music, cable, and streaming subscriptions 
  • Internet bill 
  • Landscaping costs 
  • Storage unit rent
  • Income tax 

Your gross monthly income is just your monthly pay before things like taxes and other deductions are taken out. Some common types of income that are factored into your DTI ratio, are as follows: 

  • Gross income, whether hourly or salaried 
  • Tips and bonuses
  • Any income earned from a side gig
  • Pension income
  • Rental property income 
  • Self-employment income 
  • Social Security benefits
  • Alimony received
  • Child support received

How to Calculate Your Debt-to-Income Ratio 

You can calculate your debt-to-income ratio by dividing the sum of your monthly debt payments by your gross monthly income. Once you figure out your total monthly debts payments and add up your gross monthly income, you’ll be ready to divide those numbers and calculate your DTI ratio. 

Dividing your monthly debt payments by your gross monthly income will give you a decimal number. In order to view your DTI as a percentage, you’ll have to multiply the decimal outcome by 100. 

Example Calculation 

To get a better understanding of how to calculate your DTI ratio, let’s take a look at a fictional example.

Here’s the situation: Mike has a gross monthly income of $5,000. He pays $1,000 on his mortgage, $400 for his car, $400 in child support, and $200 for other debts. 

So, following the equation above to calculate Mike’s DTI ratio, we end up with: 

$1,000 + $400 + $400 + $200 = $2,000 

Therefore, Mike’s DTI ratio = $2,000 / $5,000 = 0.4 x 100 = 40% 

What is an Ideal Debt-to-Income Ratio?

In general the lower your debt-to-income ratio is, the more likely it is that you’ll be approved for a loan you’re applying for. According to, DTI ratios that fall between zero to 35% are considered healthy according to the standards of most major lenders, since they indicate that your debt is at a manageable level relative to your monthly income. 

So what is a bad DTI ratio? Having a DTI ratio of 50% and above is considered an unhealthy level of debt in most cases, and can severely limit the kinds of loans you qualify for. Such a high ratio indicates that you likely don’t have much money to save or spend each month after making your current debt payments.

What is the 43% Rule?

The 43% rule is a rule of thumb used by banks and lenders to determine who is able to be approved for a Qualified Mortgage. Generally speaking, 43% is the highest DTI ratio you can have in order to be approved for a Qualified Mortgage by a lender. 

If you’re unfamiliar with what a Qualified Mortgage is, it’s a category of loans that meet a particular set of standards and certain safety features that protect both the borrower and the lender. In order for a lender to offer you a Qualified Mortgage, they must adhere to certain requirements and make a good faith effort to evaluate your finances and determine whether you’ll be able to repay the loan or not. 

The upside of a Qualified Mortgage is that it has a number of parameters in place that are supposed to help prevent you from taking out a loan you can’t afford. Some of the requirements for a Qualified Mortgage include:

  • The restriction of risky loan features, such as interest-only periods and balloon payments 
  • A limit on your debt-to-income ratio, the maximum typically being 43%
  • Caps—dependent on the size of your loan—on the amount of upfront points and fees a lender is able to charge 
  • Legal protections for lenders, since it’s assumed that they did their due diligence to ensure you had the ability to pay back your loan
  • Maximum loan term is required to be no longer than 30 years  

All of this isn’t to say that you can’t take out a mortgage at all if your DTI ratio exceeds 43%. You may still qualify for other mortgages with a high DTI ratio, but you generally won’t be able to get approved for a Qualified Mortgage. 

Does Your DTI Ratio Impact Your Credit?

While your DTI ratio has no direct impact on your credit score, it can affect your ability to secure loans from banks and other lenders. A low DTI ratio increases the likelihood that you will be approved for the loans you apply for. That’s because lenders take a low DTI ratio as a sign that you are competent when it comes to money management and they can rely on you to pay back any debt you accrue according to the agreed-upon terms. Lenders also take a loan applicant’s DTI ratio into consideration because they want to ensure that borrowers aren’t taking out more debt than they can realistically pay back. 

Although a lower DTI ratio typically makes it easier to get approved for a loan, keep in mind that it’s only one out of many factors that lenders take into consideration. When evaluating a mortgage loan application, lenders will also take a look at a potential borrower’s gross monthly income, the amount they can afford on a down payment, their credit history, and their credit score. 

How to Improve Your DTI Ratio 

There are two variables that go into calculating your DTI ratio—your total monthly debt payments and your gross monthly income. Therefore, to improve your DTI ratio you’ll need to either reduce your total monthly debt payments or increase your gross monthly income. 

Reduce Your Monthly Debt Payments 

Completely paying off debts is a great way to lower your monthly debts payments, but of course this is much easier said than done. Your first step should be to take a look at any loans you’ve already taken out and come up with a comprehensive repayment plan. For example, check out our money tips for recent college grads to get some advice on how to formulate a repayment plan for your student loans.

To avoid going further into debt, you should also make an effort to work on your personal finance skills. Try creating a monthly budget for yourself that can help you prioritize essentials, track your spending, and save money, made easy when you use the Mint app.

If you’ve already done some research on how to lower your monthly debt payments, you may be asking yourself, “Is debt consolidation a good idea?” Debt consolidation is when you combine all of your various debts together into one monthly payment with a fixed interest rate, and it may be a good idea depending on your circumstances. 

If you don’t think you’ll be able to make a payment on one or several debts, then you can potentially avoid a late payment by consolidating that debt. However, you must have good credit to get approved for a debt consolidation loan and you should be certain that your financial situation will improve in the near future. If you don’t think you’ll be able to pay back your debts, even with debt consolidation, then you’d likely be better off trying to settle the debts directly with your creditors.

Increase Your Gross Monthly Income

Just like reducing your monthly debt payments, increasing your gross monthly income is a lot easier said than done. After all, it’s not every day that you’re given a raise or offered a job with a high-paying salary. Nevertheless, there are still ways to potentially increase your gross monthly income. Research passive income ideas or check out these examples of things you can do to make a little extra money:

  • Take up a side hustle, such as driving for a ride share company, taking on freelance writing projects, babysitting, etc. 
  • Rent out an extra room in your home (if you have more than one property, consider turning one of them into a vacation rental) 
  • Get a relevant certification or license that would either increase the salary of your current position or help you find a new, higher-paying job 
  • If possible, try to pick up more shifts or get extra hours at work

If you’re in the market for a sizable loan, such as a mortgage loan, you’ll have an easier time securing financing with a lower debt-to-income ratio. If your DTI ratio is higher than 43%, then you might consider waiting to purchase a home until you can lower that number and qualify for a better loan. You should generally try to keep your DTI ratio as low as possible even when you aren’t shopping around for loans. This means minimizing your monthly debt payments and maximizing your gross monthly income—two things that can be hard to achieve, but not impossible. Having a well-thought-out personal finance strategy will make it easier to achieve these goals, keep your DTI ratio consistently low, and provide both you and potential lenders with a sense of financial security. 

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What Type of Mortgage Is Best for You?

Just as homes come in different styles and price ranges, so do the ways you can finance them. While it may be easy to tell if you prefer a rambler to a split-level or a craftsman to a colonial, figuring out what kind of mortgage works best for you requires a little more research. There are many different loan types to choose from, and a great lender can walk you through all of your options, but you can start by understanding these three main categories.

Fixed-rate loan or adjustable-rate loan

When deciding on a loan type, one of the main factors to consider is the type of interest rate you are comfortable with: fixed or adjustable. Here’s a look at each of these loan types, with pros and cons to consider.

Fixed-rate mortgages

This is the traditional workhorse mortgage. It gets paid off over a set amount of time (10, 15, 20 or 30 years) at a specific interest rate. A 30-year fixed is the most common. Market rates may rise and fall, but your interest rate won’t budge.

Why would you want a fixed-rate loan? One word: security. You won’t have to worry about a rising interest rate. Your monthly payments may fluctuate a bit with property tax and insurance rates, but they’ll be fairly stable. If rates drop significantly, you can always refinance. The shorter the loan term, the lower the interest rate. For example, a 15-year fixed will have a lower interest rate than a 30-year fixed.

Why wouldn’t you want a fixed rate? If you plan on moving in five or even 10 years, you may be better off with a lower adjustable rate. It’s the conservative choice for the long term, which means you will pay for the security it promises.

Adjustable-rate mortgages (ARMs)

You’ll get a lower initial interest rate compared to a fixed-rate mortgage but it won’t necessarily stay there. The interest rate fluctuates with an indexed rate plus a set margin. But don’t worry — you won’t be faced with huge monthly fluctuations. Adjustment intervals are predetermined and there are minimum and maximum rate caps to limit the size of the adjustment.

Why would you want an ARM? Lower rates are an immediate appeal. If you aren’t planning on staying in your home for long, or if you plan to refinance in the near term, an ARM is something you should consider. You can qualify for a higher loan amount with an ARM (due to the lower initial interest rate). Annual ARMs have historically outperformed fixed rate loans.

Why wouldn’t you want an ARM? You have to assume worst-case scenario here. Rates may increase after the adjustment period. If you don’t think you’ll save enough upfront to offset the future rate increase, or if you don’t want to risk having to refinance, think twice.

What should I look for? Look carefully at the frequency of adjustments. You’ll get a lower starting rate with more frequent adjustments but also more uncertainty. Check the payments at the upper limit of your cap and make sure you can afford them. Relying on a refinance to bail you out is a big risk.

Here are the types of ARMs offered:

  • 3/1 ARM: Your interest rate is set for 3 years then adjusts annually for 27 years.
  • 5/1 ARM: Your interest rate is set for 5 years then adjusts annually  for 25 years.
  • 7/1 ARM: Your interest rate is set for 7 years then adjusts annually for 23 years.
  • 10/1 ARM: Your interest rate is set for 10 years then adjusts annually for 20 years.

2. Conventional loan or government-backed loan

You’ll also want to consider whether you want — or qualify for — a government-backed loan. Any loan that’s not backed by the government is called a conventional loan. Here’s a look at the loan types backed by the government.

Federal Housing Administration (FHA) loans

FHA loans are mortgages insured by the Federal Housing Administration. These loans are designed for borrowers who can’t come up with a large down payment or have less-than-perfect credit, which makes it a popular choice for first-time home buyers. FHA loans allow for down payments as low as 3.5 percent and credit scores of 580 or higher. A credit score as low as 500 may be accepted with 10 percent down. You can search for FHA loans on Zillow.

Because of the fees associated with FHA loans, you may be better off with a conventional loan, if you can qualify for it. The FHA requires an upfront mortgage insurance premium (MIP) as well as an annual mortgage insurance premium paid monthly. If you put less than 10 percent down, the MIP must be paid until the loan is paid in full or until you refinance into a non-FHA loan. Conventional loans, on the other hand, do not have the upfront fee, and the private mortgage insurance (PMI) required for loans with less than 20 percent down automatically falls off the loan when your loan-to-value reaches 78 percent.

Veterans Administration (VA) loans

This is a zero-down loan offered to qualifying veterans, active military and military families. The VA guarantees the loan for the lender, and the loan comes with benefits not seen with any other loan type. In most cases, you pay nothing down and you will never have to pay mortgage insurance. If you qualify for a VA loan, this is almost always the best choice. You can learn more about qualifying guidelines for VA loans or look for VA lenders on Zillow.

USDA loans

USDA loans are backed by the United States Department of Agriculture (USDA) and are designed to help low- or moderate-income people buy, repair or renovate a home in rural areas. Some suburban areas qualify, too. If you are eligible for a a USDA loan, you can purchase a home with no down payment and get below-market mortgage rates.

3. Jumbo loan or conforming loan

The last thing to consider is whether you want a jumbo loan or conforming loan. Let’s take a look at the difference between the two.

A conforming loan is any home loan that follows Fannie Mae and Freddie Mac’s conforming  guidelines. These guidelines include credit, income, assets requirements and loan amount. Currently the limit in most parts of the country is $417,000, but in certain designated high-price markets it can be as high as $938,250. Wondering if you’re in a high-cost county? Here is the entire list of conforming loan limits for high-cost counties in certain states.

Loans that exceed this amount are called jumbo loans. They’re also referred to as non-conforming mortgages. Why would you want a jumbo loan? The easiest answer is because it allows you to buy a higher-priced home, if you can afford it. But these loans have flexibility that conforming loans don’t have, such as not always requiring mortgage insurance when the down payment is less than 20 percent. Why wouldn’t you want a jumbo loan? Compared to conforming loans, interest rates will be higher. And they often require higher down payments and excellent credit, which can make them more difficult to qualify for.

You can read more about these and other programs here. It’s also a good idea to talk to a local lender to hear more about their options — get prepared by familiarizing yourself with mortgage-related terms using our handy glossary.


FHA and VA Loans Might Put Ownership in Reach

Buying a home might be a pretty conventional act, but financing one doesn’t have to be. Loans backed by federal agencies can be a big help if you’re low on cash or your credit score isn’t where you or a conventional lender would like it to be. There’s even a loan that can help you buy a genuine fixer-upper that many lenders won’t touch. So who qualifies, and what are the benefits of these special programs? One thing to note is that the following mortgages are only for the purchase of owner-occupied homes, not investment or rental properties. Beyond that, the requirements vary depending upon the program. Here are some answers to non-conventional mortgage questions.

FHA loans

Despite the name, an FHA loan isn’t issued by the Federal Housing Authority, but it is backed by the federal government. Because your lender knows that the government is guaranteeing the loan, the credit requirements aren’t quite as strict as with a conventional loan. Rates are as good or better than with conventional loans, and you can get an FHA loan with as little as 3.5 percent down. Not every lender offers FHA loans, but you can find several on Zillow by simply getting a rate quote for a mortgage with less than 20 percent down. How much can you borrow with an FHA loan? That varies by state and county, but it’s easy to check the limit for your location.

So why doesn’t everyone get an FHA loan? Because there are some costs. You won’t have to pay for private mortgage insurance as you would with a conventional loan when you put less than 20 percent down, but you will be paying in other ways. FHA loans require an upfront mortgage insurance premium (MIP) of 1.75 percent of the loan. Despite the name, you can roll that into your monthly payments. In addition, your annual MIP is paid each month, and the rate for that varies.

If you pay less than 10 percent down, and your loan was originated on or after June 3, 2013, that monthly MIP never goes away. To stop paying it, you’ll have to refinance to a conventional loan. If you put more than 10 percent down, your are required to pay the MIP for 11 years. You can check out the schedule here.

VA loans

One way to get a zero-down mortgage is through a VA loan. So what is a VA loan? Like the FHA, the U.S. Department of Veterans Affairs doesn’t actually make loans, but it does guarantee them. To get a VA-backed loan, you need qualify for the benefit and to go to an approved lender. You can find a VA lender easily here.

Although eligibility is determined by the VA, you may qualify if you are an honorably discharged veteran or an active member of any branch of the U.S. armed service, or if you are the spouse of either a veteran killed in the line of duty or an active duty member who is listed as MIA or POW.

The service thresholds vary, particularly for those who served in the National Guard or Reserves. You can find them on the Zillow VA loan FAQ page. You will also need a Certificate of Eligibility. You can either ask your lender to obtain your COE or you can get it for yourself from the VA’s ebenefits portal online.

How much house can you buy with a VA loan? In most areas, the VA puts a limit of $417,000 on its loans. But in certain high-cost parts of the country the limit is higher. You can find the limit in your county here.

In addition to the zero-down option, VA loans do not require you to pay any kind of mortgage insurance, even when borrowing 100 percent of your home’s value. As with many things, there is a catch — but it’s relatively small. In addition to the closing costs associated with every home loan, there is a VA funding fee. However, that can be financed or rolled into your monthly payment, and some veterans may even be exempt.

FHA 203k (fixer-upper loans)

Buying a fixer-upper that’s seen better days and turning it into your dream home can become a nightmare if you don’t have a good chunk of cash for repairs stashed away. That’s where the FHA 203k loan can help. You have to meet the usual FHA requirements, but with this loan you can get extra cash upfront to finance everything from new floors to a new roof.

You can get a loan for either the as-is value of the property plus repair costs or 110 percent of the estimated value of the home once repairs are complete, whichever is less. If your fixer-upper needs more modest repairs, you can get a streamlined 203k. This loan will get you the purchase price plus up to $35,000 for things like new appliances or carpets. But don’t get too fancy. You can’t use it to add luxuries like a swimming pool.

The catch? Not all properties will qualify and the application process isn’t as easy as slapping on a fresh coat of paint. You can find more details on the HUD site.

USDA loans

The other zero-down option is a loan backed by the U.S. Department of Agriculture. These loans are for low- to moderate-income buyers looking to purchase a home in rural area. The applicant may not exceed income limits and the dwelling must be “modest, decent, safe and sanitary.”

Also, as always, you must demonstrate an adequate ability to repay the loan. The USDA website will help you determine if you or the area you want to purchase will qualify.


You Don’t Have to be a Farmer to get a Home Loan from the USDA

If you’re searching for a good deal on a mortgage, you might want to look into little-known home loan programs run by the US Department of Agriculture. A USDA loan can be just as good, or even better than an FHA or VA loan. However, you must live in an area considered “rural” by the Department of Agriculture and meet income limits that vary by county and size of your family. The mortgage insurance that USDA requires is similar to fees charged by VA but significantly less than you would pay for FHA mortgage insurance or private mortgage insurance required for conventional loans with a down payment lower than 20%.

USDA loans also have a number of great features. They are zero down payment loans, the same as VA and less than FHA’s 3.5%. You can use USDA loans for repairs, rehabilitation, refinancing and even a pro-rated share of real estate taxes. They can be used to buy vacant lots, condominiums, and even manufactured (mobile) homes.

rural town perfect for usda home loansrural town perfect for usda home loans

USDA Single-Family Home Loans

The USDA offers three programs designed to provide rural residents decent, safe, and sanitary housing in eligible areas.

Single-Family Housing Guaranteed Loan Program.  This is USDA’s most popular program. It features zero down payments and enables banks, mortgage companies, credit unions, and other qualified lenders to provide zero down payment financing by guaranteeing 90% of the loan, which greatly reduces lenders’ risk. Here is a national list of approved lenders.

The annual USDA mortgage insurance premium covers just 0.35% of the loan amount—and is 40% lower than the mortgage insurance premium charged for a comparable FHA-backed loan. It requires a 1% up-front fee and a 0.35% annual fee based on the remaining balance of the principal.

These loans can be used for:

  • Purchasing a new or existing home to be used as a permanent residence;
  • Pay costs associated with buying a home, such as closing costs, home inspection and other customary expenses associated with a home purchase;
  • Repairs and rehabilitation associated with the purchase of an existing home, such as mold remediation or termite damage;
  • Refinancing an existing mortgage or eligible loans;
  • Special design features or equipment to accommodate a household member who has a physical disability;
  • Connection fees and installment costs for utilities such as water, sewer, electricity, and gas;
  • A pro-rated share of real estate taxes due on closing;
  • Purchasing and installing features to improve energy efficiency such as insulation, double-paned glass, and solar panels;
  • Fixed broadband service, as long as the equipment is conveyed with the sale;
  • Purchase of a lot and site preparation costs, including grading, foundation plantings, seeding or sod installation, trees, sidewalks, fences and driveways; and
  • Site preparation costs, including grading, foundation plantings, seeding or sod installation, trees, sidewalks, fences, and drives.

Single Family Direct Loan Program. This is a “payment assistance” program that helps low-income applicants get decent, safe and sanitary housing to increase their ability to repay. It is a type of subsidy that reduces mortgage payments for a short period determined by a family’s adjusted income and is available only to families that cannot obtain a mortgage from other sources. It’s a “direct” program, which means USDA makes loans directly to buyers rather than through an approved lender. Borrowers must repay all or a portion of the loan before selling the home.


  • Properties must be 2,000 square feet or less and be worth less than the applicable local loan limit as set by USDA.
  • Borrowers must be unable to obtain a loan from other resources on terms and conditions that they can reasonably be expected to meet.
  • Borrowers must demonstrate a willingness and ability to repay debt.

Single-Family Housing Repair Loans & Grants. These help very-low-income homeowners to repair, improve or modernize their homes. Loans may be used to repair, improve or modernize homes or remove health and safety hazards and grants must be used to remove health and safety hazards.


  • Borrowers must be unable to obtain affordable credit elsewhere and have a family income below 50 percent of the area median income.
  • The maximum loan under this program is $20,000; the maximum grant is $7,500.

Eligibility: Location and Income

Generally, USDA Home Loans are available only to citizens or permanent residents who live in counties or portions of counties where the total population is 35,000 or less. In 2013, the average household income for direct borrowers was $28,600 while guaranteed loan recipients earned an average of $54,200.

Rural areas are adjusted to reflect the latest data from the Census Bureau. Income limits are based on a national target of $75,650 for households with 1-4 family members and up to $153,400 in certain high-cost areas.

To find out if you are eligible for either the direct or guaranteed loan program, go here and enter your address. Click on “property eligibility,” “income eligibility,” or “income limits” in the menu across the top of the screen. Go here to find out if you qualify based on family size, income, and location.

For current information on programs in your state, go here.

Steve Cook is the editor of the Down Payment Report and provides public relations consulting services to leading companies and non-profits in residential real estate and housing finance. He has been vice president of public affairs for the National Association of Realtors, senior vice president of Edelman Worldwide and press secretary to two members of Congress.


What Is Escrow and How Does It Work?

No matter where you’re buying a home, at some point you’re going to find yourself deep in escrow. (Don’t worry. It’s not as bad as it sounds.) What is escrow? In real estate, it has several meanings, but they all boil down to your house and your money being in a kind of limbo.

Escrow is when an impartial third party holds on to something of value during a transaction.

Escrow and offers

When you make an offer on a home, you will write an earnest money check that will be placed in “escrow.” That means it isn’t going directly to the seller but is being held by an impartial third party until you and the seller negotiate a contract and close the deal. You can’t touch it and the seller can’t touch it. It’s in escrow.

That’s important because it protects both parties. Say you put down earnest money that went directly to the seller and then couldn’t reach a final purchase and sale agreement. You don’t want the seller holding your earnest money hostage as a negotiating ploy. Likewise, the seller won’t want to sign over the deed to the home until you’ve paid for it. And you won’t want to hand over cash without the deed being signed. Escrow ensures everyone gets what they are due at essentially the same time.

Escrow and lenders

When you are talking with your mortgage lender, you’ll hear about escrow again. They might talk about an “escrow” or “impound” account or “reserves.” They may use these terms interchangeably, and that’s OK because they all mean the same thing. They are funds held by the lender to make payments for your homeowners insurance and property taxes. Lenders will collect them monthly along with your loan payment and then pay the tax and insurance bills when they are due. That’s because your lender has a vested interest in making sure those payments are made. You may hear the term “prepaids” as well. That’s money collected in advance for those bills to ensure they’ve got enough on hand to pay them when they are due.

Escrow and closing

Finally, you may hear someone refer to the “closing of escrow.” That’s when your purchase is completed. A closing or “escrow officer” will oversee the final paperwork and handle the exchange of funds and recording of deeds. This person, sometimes an attorney, will ensure that all the money is properly disbursed, that the documents are signed and recorded, and that all necessary conditions are met before closing the escrow.

What is a hold-back of funds?

Sometimes the sale may be completed and ownership transferred while funds are still held in escrow. For instance, if you’ve agreed to let the seller’s family stay in the house for an extra week until their new home is ready, you would sign a “rent-back” agreement requiring the seller to pay you a daily rate for the length of their stay. In the case of such a rent-back, your real estate agent will likely advise you to have the escrow agent hold back a portion of the seller’s proceeds until they’ve moved out and left the house in the condition specified in your contract.

Or perhaps you found something wrong during your final walkthrough of the house. Maybe the seller agreed to make the repair, but the work couldn’t be completed by closing day. Money can be held in escrow to cover the cost.

If you’re purchasing new construction, you may have funds held in escrow until all work is complete and you’ve signed off on it.

Once escrow is closed and all funds have been disbursed, you and the seller will receive a final closing statement and other documents in the mail. Check the statement carefully and call the closing agent immediately if you spot an error. File the statement with your most important papers. You’ll need it when you file your next income tax return.


What Can Go Wrong on Closing Day – and How to Prevent It

Some surprises are great. An unexpected bonus or a hotel upgrade can make your day. But when it comes to closing on a home, a surprise is almost never a good thing.

Paperwork tedium will give way to terror if there’s an unexpected delay in financing or error in a title document. But you can avoid closing problems and delays, or at lease minimize them, by understanding what might go wrong and monitoring it well ahead of your closing date.

What happens at closing is the culmination of more than a month of gathering and preparing documents. For closing to go off without a glitch, your closing officer, your lender or loan officer and your real estate agent have to work together to get everything in order and processed correctly. These folks are professionals and they absolutely should know what they are doing. But they are also human beings working on a lot of files, not just yours.

If your closing gets pushed back a day, that just means they do it on Tuesday instead of Monday. It really isn’t an emergency in their world. You, however, have a moving truck scheduled and deadline to vacate your current home. Your loan commitment has an expiration date and so does your escrow. All of this means it’s more critical to you than it is to anyone else to get the deal completed on time, so it’s wise for you to stay on top of things.

With that in mind, here are a few common closing problems as well as ways to prevent them.

Problem: Errors in documents

One of the most common closing problems is an error in documents. It could be as simple as a misspelled name or transposed address number or as serious as an incorrect loan amount or missing pages. Either way, it could cause a delay of hours or even days.

Prevention: Preview everything
Go ahead and ask to see every piece of paperwork as far in advance as possible. Pay special attention to loan documents. By law, you will get your Loan Estimate and Closing Disclosure forms three days before closing. Look at them carefully and immediately. The sooner you spot a problem the faster you can get it fixed and keep your closing on track. If something seems odd or you just don’t understand it, this is the time to ask questions. Double-check the loan and down payment amounts, interest rates, spellings and all personal information.

Problem: Mortgage delays and last-minute requests

When you set a closing date and communicate that with your lender, you probably assume they will let you know in plenty of time if there are problems with meeting that deadline. You would be wrong. Understand that in a hot real estate buying or refinancing market, lenders can be inundated. Without periodic calls from you and your real estate agent, who also has a vested interest in closing the deal on time, your file could easily fall to the bottom of the pile while the loan officer deals with more urgent loans. By the time your loan is at the top of the priority list, it might be too late to get that missing document in time. Lenders sometimes ask for more information at the last minute – copies of a rental agreement, a canceled deposit check, the original hazard insurance payment – that can leave you scrambling and lead to closing delays.

Prevention: Check in with everyone
Early on, find out exactly what documents the lender needs to complete your file and write you loan. Between bank statements, tax returns and other documents, there are ample opportunities for items to go missing or be forgotten about until the last minute. Once you know what they need to write your loan, call or email periodically to make sure they have everything. (Your real estate agent may also be doing this so check with them as well.) How often? That depends on how much is missing from your file. But a weekly check-in isn’t out of hand until they confirm your file is complete. If there are problems or several missing documents, check in more often. Always make sure they are aware of your anticipated closing date.

Several days before closing, check in with your closing agent to make sure they are in communication with your lender and that they have everything they need. If there is something you think they might possibly need but no one has mentioned it, bring it to the closing meeting.

Problem: Cash flow

You go to the bank the day before closing and arrange to have your down payment transferred directly to the closing agent. You’re good to go. Unless the transfer falls through due to some bug in the bank’s system and the money either doesn’t get there in time or what comes through is less than the amount you need.

Prevention: Bring it

You can avoid this issue entirely by bringing your down payment in the form of a certified or cashier’s check. (You can’t use a personal check, so don’t even try that.) Or, simply arrange the wire or bank transfer of funds so it reaches the closing agent a couple of days early. If you don’t yet know the exact amount needed at closing, have more than enough money transferred. You’ll get a refund later.

Problem: Title isn’t exactly clear

Maybe the title company discovers that the seller never paid the contractor for the backyard fence or hasn’t paid property taxes for five years and there is a lien on the property. Or perhaps the home is the subject of a lawsuit between bickering relatives. Interesting as that may be, the bottom line is that you, the buyer, have a problem. You need to insist on a clear, unclouded, problem-free title before closing. Your lender will insist on it, too.

Prevention: Read the title report

Shortly after escrow opened, the title company completed a preliminary title report. That often goes directly to your lender, but you can get a copy either from the title company or your lender. Get it as soon as possible and read it carefully. At closing you’ll buy title insurance to protect yourself in case the title company missed anything in its search, but that policy is only effective from the day of closing forward.

Problem: Something’s amiss at your walk-through

It’s the day before closing and you’re doing a final walk-through of what is almost your home. The seller has punched a hole in the wall and ripped down the fixtures they were supposed to leave.

Prevention: Jump on it right now

Your agent should work with the seller’s agent to solve the problems. First, figure out what’s acceptable, how much it might cost and how to make the seller pay. One way would be to negotiate a credit on your closing fees, meaning the seller pays more at closing. Another would be to have the appropriate amount from the seller’s proceeds placed in escrow until the problems are fixed.

The point is, don’t wait until closing to bring up any issues. Get them resolved beforehand. If you can’t, you’ll have to postpone the closing while you work it out. In some cases, you may prefer to just accept responsibility for the problems rather than delay closing, but that’s up to you.


Now is the best time to secure a mortgage, study finds

Home buyers should move quickly if they want to lock in the best possible terms on their mortgage, as the winter months typically see lenders providing much better deals on their loans.

A new study by home finance startup Haus found that lenders typically offer discounts of up to 20 basis points in January compared to the period from June to October, when rates are at their highest. The study looked at seasonality, loan sizes, credit scores and other factors used to determine mortgage rates, analyzing loan data from Freddie Mac for more than 8.5 million mortgages that originated between 2018 and 2021.

After January, December and February are the next cheapest months to obtain a mortgage, the study found.

“While we can’t say for exact certainty why rates are lower in January than in the summer months, we can speculate that competition for customers matters,” Ralph McLaughlin, chief economist at Haus, told Market Watch. “Since home buying and refinancing is seasonal, there is less mortgage origination in winter months, so it could be that lenders must lower their rates to stay competitive and attract business.”

That said, the housing market is different this year as sales have been booming throughout winter. That’s partly because mortgage rates have been hovering at an all-time low for months now. In addition, some economists say that rates could increase in the coming months, though it depends on the overall trajectory of the economy.

The problem for many buyers is they don’t have a lot of control over the timing of their loans. The study notes the importance of having a good credit rating to obtain the best possible deal. Borrowers with a credit score of 800+ tend to get mortgages with rates of 42 basis points less than those borrowers whose credit scores are below 650.

Buyers can make savings by shopping around too. The study found a discrepancy of 75 basis points between the most and least expensive large mortgage lenders in the U.S.

“This means that, all else equal, the same borrower would get a 5% rate with the most expensive lender and a 4.25% rate with the least expensive lender,” McLaughlin said.


6 Things Your Mortgage Lender Wants You To Know About Getting a Home Loan During COVID-19

Getting a mortgage, paying your mortgage, refinancing your mortgage: These are all major undertakings, but during a pandemic, all of it becomes more complicated. Sometimes a lot more complicated.

But make no mistake, home buyers are still taking out and paying down mortgages during the current global health crisis. There have, in fact, been some silver linings amid the economic uncertainty—hello, record-low interest rates—but also plenty of changes to keep up with. Mortgage lending looks much different now than at the start of the year.

Whether you’re applying for a new mortgage, struggling to pay your current mortgage, or curious about refinancing, here’s what mortgage lenders from around the country want you to know.

1. Rates have dropped, but getting a mortgage has gotten more complicated

First, the good news about mortgage interest rates: “Rates have been very low in recent weeks, and have come back down to their absolute lowest levels in a long time,” says Yuri Umanski, senior mortgage consultant at Premia Relocation Mortgage in Troy, MI.

That means this could be a great time to take out a mortgage and lock in a low rate. But getting a mortgage is more difficult during a pandemic.

“Across the industry, underwriting a mortgage has become an even more complex process,” says Steve Kaminski, head of U.S. residential lending at TD Bank. “Many of the third-party partners that lenders rely on—county offices, appraisal firms, and title companies—have closed or taken steps to mitigate their exposure to COVID-19.”

Even if you can file your mortgage application online, Kaminski says many steps in the process traditionally happen in person, like getting notarization, conducting a home appraisal, and signing closing documents.

As social distancing makes these steps more difficult, you might have to settle for a “drive-by appraisal” instead of a thorough, more traditional appraisal inside the home.

“And curbside closings with masks and gloves started to pop up all over the country,” Umanski adds.

2. Be ready to prove (many times) that you can pay a mortgage

If you’ve lost your job or been furloughed, you might not be able to buy your dream house (or any house) right now.

“Whether you are buying a home or refinancing your current mortgage, you must be employed and on the job,” says Tim Ross, CEO of Ross Mortgage Corp. in Troy, MI. “If someone has a loan in process and becomes unemployed, their mortgage closing would have to wait until they have returned to work and received their first paycheck.”

Lenders are also taking extra steps to verify each borrower’s employment status, which means more red tape before you can get a loan.

Normally, lenders run two or three employment verifications before approving a new loan or refinancing, but “I am now seeing employment verification needed seven to 10 times—sometimes even every three days,” says Tiffany Wolf, regional director and senior loan officer at Cabrillo Mortgage in Palm Springs, CA. “Today’s borrowers need to be patient and readily available with additional documents during this difficult and uncharted time in history.”

3. Your credit score might not make the cut anymore

Economic uncertainty means lenders are just as nervous as borrowers, and some lenders are raising their requirements for borrowers’ credit scores.

“Many lenders who were previously able to approve FHA loans with credit scores as low as 580 are now requiring at least a 620 score to qualify,” says Randall Yates, founder and CEO of The Lenders Network.

Even if you aren’t in the market for a new home today, now is a good time to work on improving your credit score if you plan to buy in the future.

“These changes are temporary, but I would expect them to stay in place until the entire country is opened back up and the unemployment numbers drop considerably,” Yates says.

4. Forbearance isn’t forgiveness—you’ll eventually need to pay up

The CARES (Coronavirus Aid, Relief, and Economic Security) Act requires loan servicers to provide forbearance (aka deferment) to homeowners with federally backed mortgages. That means if you’ve lost your job and are struggling to make your mortgage payments, you could go months without owing a payment. But forbearance isn’t a given, and it isn’t always all it’s cracked up to be.

“The CARES Act is not designed to create a freedom from the obligation, and the forbearance is not forgiveness,” Ross says. “Missed payments will have to be made up.”

You’ll still be on the hook for the payments you missed after your forbearance period ends, so if you can afford to keep paying your mortgage now, you should.

To determine if you’re eligible for forbearance, call your loan servicer—don’t just stop making payments.

If your deferment period is ending and you’re still unable to make payments, you can request delaying payments for additional months, says Mark O’ Donovan, CEO of Chase Home Lending at JPMorgan Chase.

After you resume making your payments, you may be able to defer your missed payments to the end of your mortgage, O’Donovan says. Check with your loan servicer to be sure.

5. Don’t be too fast to refinance

Current homeowners might be eager to refinance and score a lower interest rate. It’s not a bad idea, but it’s not the best move for everyone.

“Homeowners should consider how long they expect to reside in their home,” Kaminski says. “They should also account for closing costs such as appraisal and title insurance policy fees, which vary by lender and market.”

If you plan to stay in your house for only the next two years, for example, refinancing might not be worth it—hefty closing costs could offset the savings you would gain from a lower interest rate.

“It’s also important to remember that refinancing is essentially underwriting a brand-new mortgage, so lenders will conduct income verification and may require the similar documentation as the first time around,” Kaminski adds.

6. Now could be a good time to take out a home equity loan

Right now, homeowners can also score low rates on a home equity line of credit, or HELOC, to finance major home improvements like a new roof or addition.

“This may be a great time to take out a home equity line to consolidate debt,” Umanski says. “This process will help reduce the total obligations on a monthly basis and allow for the balance to be refinanced into a much lower rate.”

Just be careful not to overimprove your home at a time when the economy and the housing market are both in flux.

For more smart financial news and advice, head over to MarketWatch.