As we find ourselves in the dog days of summer, and careening toward August, Orion is continuing to see a large percentage of our business come from brokers working with home buyers, either first time home buyers or clients who have used brokers before and are moving up. A specialty of good brokers is helping clients understand the terminology of the buying and financing process.

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One calculation borrowers ask brokers about is referred to as debt-to-income ratio(DTI). Yes, brokers know this, but it is good to have it re-explained once in awhile. The DTI is calculated by dividing your client’s monthly debt obligations by their pretax, or gross, income. This calculation helps Orion establish how much of a monthly mortgage payment can be afforded. Most lenders look for a ratio of 36% or less.

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There are two kinds of debt-to-income ratios: The front-end ratio is the dollar amount of your client’s home-related expenses, like their proposed monthly mortgage, property tax, insurance, and homeowners’ association fees, divided by their monthly gross income. The back-end ratio includes all the other debts they pay each month, such as credit cards, student loans, personal loans, and car loans ,in addition to proposed household expenses. Ideally, of course, you want your client’s DTIs as low as possible. A lower DTI will help their credit score, which will in turn allow them to get a lower mortgage interest rate at Orion.

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Keep in mind, DTIs don’t take into account expenses such as food, health insurance, utilities, gasoline and entertainment. Brokers will often tell clients that they will want to budget beyond what their DTI labels “affordable.”

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If your client’s ratios are too high, there are several ways to lower their DTI. First, avoid taking on more debt. Brokers remind borrowers to not make any big purchases on credit before they buy a home. Orion’s AE’s have heard plenty of stories where this happens… some funny, most not. Also, brokers tell clients to try to pay off as much of their current debt as possible before they even apply for a mortgage. While a pay raise at work is another way to lower the DTI, it’s not safe to rely on something that might not happen. That’s why it’s better to avoid taking on more debt and work on lowering their current debt.

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Orion’s brokers remind clients that purchasing a home is a big financial commitment. Orion’s AEs will help you to be aware of options and work toward the best possible scenario for your client’s individual situation. You want your client to love their new home and enjoy not paying rent, not dread scrimping to cover the monthly payment.