When you’re thinking about borrowing money, you may come across plenty of financial terms and abbreviations. Two you might hear are DTI and LTV.
While they may sound complicated, both are simply ways of looking at your financial picture. Understanding what they mean can help you feel more prepared when you’re considering a loan, whether you’re buying a home, purchasing a vehicle, or working toward another financial goal.
What Is DTI?
DTI stands for debt-to-income ratio. It compares your monthly debt payments with your monthly income before taxes and other deductions.
To calculate your DTI, add up your monthly debt payments and divide that amount by your gross monthly income. Then multiply by 100 to get a percentage.
For example, let’s say your monthly debt payments total $1,500 and your gross monthly income is $5,000.
$1,500 ÷ $5,000 = 30% DTI
Monthly debt payments can include obligations such as a mortgage or rent payment, auto loans, student loans, credit card payments and other recurring debts.
Why does DTI matter? It provides a way to see how much of your monthly income is already committed to debt. Lenders may consider DTI when evaluating your ability to manage an additional monthly payment.
There isn’t one DTI percentage that applies to every situation. Requirements can vary depending on the lender, type of loan and other factors considered during the lending process.
What Is LTV?
LTV stands for loan-to-value ratio. Rather than comparing your debt with your income, LTV compares the amount you’re borrowing with the value of the property securing the loan.
For example, imagine you’re purchasing a home valued at $200,000 and borrowing $160,000.
$160,000 ÷ $200,000 = 80% LTV
In this example, the loan represents 80% of the home’s value.
Your down payment can affect your LTV. Generally, putting more money down means borrowing a smaller percentage of the property’s value, resulting in a lower LTV.
Lenders may use LTV as one factor when evaluating a secured loan. Depending on the type of loan, LTV can also affect loan terms or other requirements.
DTI vs. LTV: What’s the Difference?
An easy way to remember the difference is to think about what each number measures:
DTI is about your monthly budget. It shows how your debt payments compare with your income.
LTV is about the loan and the property. It shows how much you’re borrowing compared with the property’s value.
Together, these numbers can provide different perspectives on a borrowing decision. One looks at your ability to manage debt based on your income, while the other looks at how much of an asset’s value is being financed.
Neither number tells the entire story. Depending on the type of loan, lenders may also consider factors such as your credit history, income, assets and other financial information.
Get to Know Your DTI
You don’t have to be applying for a loan to benefit from knowing your DTI. Keeping an eye on it can give you a better understanding of how your current debt fits into your overall financial picture.
Patterson State Bank customers can now make that easier with a DTI calculator available in the Patterson State Bank mobile app. Simply enter your annual income and monthly housing payment to get additional insight into your debt-to-income ratio.
Whether you’re planning your next big purchase or simply want to better understand your finances, knowing numbers like DTI and LTV can help you approach financial decisions with greater confidence.
And when you’re ready to talk about your borrowing options, the team at Patterson State Bank is here to help you understand the numbers and find an option that fits your needs.
