Calculators

This question aims to clarify the significance of the debt-to-income ratio in the home affordability equation.

Front-end DTI: Also called a PITI ratio (principal, taxes, interest, and insurance), this number reflects your total housing debt in relation to your monthly income.

Back-end DTI: Your back-end DTI (or “total” DTI) encompasses all your monthly debts in relation to your income.

FHA loans: back-end DTI ratio of 43% or less
VA loans: maximum 41%
USDA loans: 41% or lower
Conventional loans: a back-end DTI of 36% or lower

What’s an Ideal Debt-to-Income Ratio for a Mortgage?

The loan-to-value ratio (LTV) is a tool for assessing the relationship between the client’s mortgage amount and the value of the desired home. Lenders commonly employ the LTV to gauge the risk associated with extending credit to a client as a borrower.
To figure out your LTV ratio, divide your current loan balance (you can find this number on your monthly statement or online account) by your home’s appraised value. Multiply by 100 to convert this number to a percentage.

There is no one-size-fits-all rule for down payments when it comes to buying a home because the amount of your down payment can vary based on several factors, including your financial situation, the type of mortgage loan you’re using, and the lender’s requirements.

However, here are some general guidelines and considerations regarding down payments for buying a home:

1. Minimum Down Payment Requirements: The minimum down payment required can vary depending on the type of mortgage loan you’re using and your creditworthiness. Here are some common minimum down payment requirements for different types of loans in the United States:
   • Conventional Loans: Conventional mortgages typically require a down payment of at least 3% to 20% of the home’s purchase price. However, some lenders may offer programs with lower down payment options for well-qualified borrowers.
   • FHA Loans: Federal Housing Administration (FHA) loans often require a down payment of 3.5% of the home’s purchase price. FHA loans are popular among first-time homebuyers.
   • VA Loans: If you’re eligible for a VA loan (usually reserved for veterans and active-duty service members), you can often buy a home with no down payment.
   • USDA Loans: The U.S. Department of Agriculture (USDA) offers loans with no down payment for eligible rural and suburban homebuyers.
2. Private Mortgage Insurance (PMI): If your down payment is less than 20% of the home’s purchase price, you may be required to pay for private mortgage insurance (PMI). PMI protects the lender in case you default on the loan. It adds to your monthly housing costs, so factor this into your budget.

To figure out your LTV ratio, divide your current loan balance (you can find this number on your monthly statement or online account) by your home’s appraised value. Multiply by 100 to convert this number to a percentage.

See above

Capitalization Rate Formula:

Net Operating Income / Purchase Price = Capitalization Rate

The capitalization rate, often abbreviated as “cap rate,” is a key metric used in real estate investing to evaluate the potential return on an investment property. It’s a fundamental concept in real estate finance and helps investors assess the risk and profitability of a real estate investment.

1. Net Operating Income (NOI): This is the income generated by the property after deducting all operating expenses but before accounting for mortgage payments or income taxes. NOI typically includes rental income, minus vacancies, property taxes, insurance, property management fees, maintenance costs, and other operational expenses.
2. Property Value or Purchase Price: This is the current market value of the property or the price you paid for it.

Price-to-rent Ratio:

Median Home Price / Median Annual Rent = Price to Rent Ratio

1 to 15: A Price-to-Rent Ratio of 1 to 15 suggests that buying is a favorable choice over renting.

16 to 20: A Price-to-Rent Ratio of 16 to 20 indicates that renting is usually the more sensible option,

21+: A Price-to-Rent Ratio of 21 or higher signifies that renting is significantly more advantageous than buying.

This is a very general rule of thumb and if you are interested in the results, you will want to explore a more thorough understanding of the rent vs. buy option using our Rent vs. Buy calculator.

Gross Rent Multiplier formula:

Purchase Price or Value / Gross Rental Income = Gross rent multiplier

The Gross Rent Multiplier (GRM) is a real estate valuation metric used by investors and appraisers to quickly assess the potential value of an income-producing property. It provides an estimate of a property’s value based on its rental income.

Here’s what each component of the formula represents:

• Property Price or Value: This is the current market value or purchase price of the property you are evaluating. It represents how much the property is worth.
• Gross Annual Rental Income: This is the total annual rental income generated by the property before deducting any expenses such as property management fees, property taxes, insurance, or vacancies. It includes all rental income from the property.

The resulting GRM represents the number of years it would take for the property’s rental income to pay off the property’s value at its current price. In other words, it indicates how many years it would take to recoup the property’s cost through rental income alone, assuming no changes in income or expenses.

Here’s how you can use the Gross Rent Multiplier:

• Comparative Analysis: Investors often use the GRM to compare the potential value of different income-producing properties. By calculating the GRM for multiple properties, you can identify which properties are priced more attractively relative to their rental income.
• Quick Estimation: The GRM provides a quick estimate of a property’s value, which can be useful for initial screening and property comparison. However, it’s important to conduct a more detailed analysis, including considering expenses and other factors, before making a final investment decision.

It’s important to note that the Gross Rent Multiplier is a simplified metric and does not take into account all the factors that affect a property’s value, such as location, property condition, financing terms, and potential for future rent increases. Therefore, while it can be a useful tool for initial assessments, it should be used in conjunction with other valuation methods and a thorough property analysis when making investment decisions.

70% Rule formula:

(ARV) x .70 − Estimated repair costs = Maximum buying price

The “70% rule” is a guideline commonly used by real estate investors to estimate the maximum purchase price they should consider paying for an investment property. It is a simplified rule of thumb that helps investors ensure they have a margin of safety and potential profitability when buying properties for renovation and resale (often referred to as “fix and flip” properties).

The 70% rule states that an investor should not pay more than 70% of the after-repair value (ARV) of a property, minus the estimated repair costs. The formula for the 70% rule is as follows:

Here’s what each component of the formula represents:

• ARV (After-Repair Value): This is the estimated market value of the property after all planned renovations and repairs have been completed. It’s based on the assumption that the property will be in a significantly improved condition, which should justify a higher selling price.
• Estimated Repair Costs: These are the anticipated expenses for repairing and renovating the property to bring it to a marketable condition. This includes costs for materials, labor, permits, and any other expenses associated with the renovations.

The resulting “Maximum Purchase Price” represents the highest amount an investor should be willing to pay for the property to ensure a potential profit. By using the 70% rule, investors aim to build in a cushion for unexpected expenses, holding costs (like property taxes and insurance), and a profit margin when selling the property.

It’s important to note that the 70% rule is a simplified guideline and does not take into account all factors that can impact the profitability of a real estate investment, such as financing costs, holding period, and market fluctuations. Investors should conduct a comprehensive analysis and consider other factors specific to the property and market conditions before making an investment decision. Additionally, different investors may use variations of the rule, such as the 65% or 75% rule, depending on their risk tolerance and local market dynamics.