Mortgage Terms, Explained Simply
No jargon, no fine print. Everything you need to know about DTI, down payments, and closing costs — in plain English.
Chapter 1
What is DTI?
DTI stands for Debt-to-Income ratio. It's the percentage of your monthly income that goes toward paying debts. Lenders use it to understand how much of your income is already spoken for before they decide how much house you can afford.
Example
You earn $6,000/month before taxes
Your car payment + student loans + credit card minimums = $1,200/month
Your DTI = $1,200 ÷ $6,000 = 20%
That means 20% of your income is already going to debt payments. The remaining 80% is for living expenses, savings, and — if you're buying — your future mortgage.
Chapter 2
Front-End vs. Back-End DTI
There are two types of DTI. The difference is which debts get counted.
Front-End DTI (Housing Ratio)
Only counts your housing costs: principal, interest, property taxes, insurance, and HOA (if any). Also called "PITI" — Principal, Interest, Taxes, Insurance.
Back-End DTI (Total Debt Ratio)
Counts all your monthly debts: housing costs plus car payments, student loans, credit cards, child support, personal loans — everything.
Example
Income: $6,000/mo
Housing payment: $1,800/mo
Other debts: $1,200/mo
Front-end DTI: $1,800 ÷ $6,000 = 30%
Back-end DTI: ($1,800 + $1,200) ÷ $6,000 = 50%
Key takeaway: When lenders and mortgage calculators say "DTI," they almost always mean back-end DTI — because it shows the full picture of your financial obligations.
Chapter 3
What DTI Numbers Matter?
These are the thresholds lenders and advisors use to evaluate your DTI:
Most financial advisors recommend keeping your back-end DTI at or below 36%. This leaves plenty of room for living expenses, savings, and unexpected costs.
The 43% threshold is the maximum most lenders will approve for a "qualified mortgage" — the standard conventional loan. Above 43%, most conventional lenders won't approve the loan.
Some lenders (especially those offering non-QM or portfolio loans) will extend to a 50% back-end DTI for well-qualified borrowers with strong credit, significant reserves, or stable income. This is evaluated case-by-case.
Important: These are guidelines, not hard rules. Each lender evaluates the full picture — credit score, employment history, savings/reserves, and the property itself. A lender might approve a 45% DTI borrower with excellent credit but decline a 40% DTI borrower with a thin credit file.
Chapter 4
What is a Down Payment?
A down payment is the upfront cash you pay toward the purchase price of the home. The rest is covered by your mortgage loan.
Example
Home price: $400,000
Down payment (5%): $20,000
Mortgage loan: $380,000
Your down payment affects three things:
Your monthly payment — More down = smaller loan = lower monthly payment
Mortgage insurance — Less than 20% down usually requires private mortgage insurance (PMI), which adds to your monthly payment
Your interest rate — Larger down payments can sometimes qualify for better rates
Chapter 5
Minimum Down Payments by Loan Type
The minimum you can put down depends on the type of loan you use:
Conventional Loan
5% minThe most common loan type. Requires private mortgage insurance (PMI) if you put less than 20% down. PMI can be removed once you reach 20% equity.
FHA Loan
3.5% minGovernment-backed loan popular with first-time buyers. More flexible on credit scores. Requires mortgage insurance premium (MIP), which typically lasts for the life of the loan.
VA Loan
0% downAvailable to eligible veterans, active-duty service members, and some surviving spouses. No down payment required and no ongoing mortgage insurance. A funding fee applies but can be rolled into the loan.
USDA Loan
0% downAvailable in eligible rural and suburban areas. No down payment required, but income limits apply and there's a guarantee fee.
Chapter 6
What are Closing Costs?
Closing costs are the fees and expenses you pay to finalize your mortgage, on top of your down payment. They're paid at "closing" — when you sign the final paperwork and receive the keys.
Example
Home price: $400,000
Down payment (5%): $20,000
Closing costs (3%): $12,000
Total cash needed at closing: $32,000
Typical range: 2% to 5% of the home's purchase price. The exact amount depends on the home price, your lender, your location, and the specific services required.
Chapter 7
What's Included in Closing Costs?
Closing costs typically fall into these categories:
Lender fees
Origination fee, underwriting fee, discount points (if you buy down your rate)
Title and escrow
Title search, title insurance, escrow fee — ensures the property title is clean and the transaction is handled properly
Government fees
Recording fees and transfer taxes paid to the county or city
Prepaids
Property taxes (prepaid months), homeowners insurance (prepaid), and prepaid interest from closing day to the end of the month
Third-party services
Appraisal, home inspection, survey, credit report
HOA transfer fees
If the home is in an HOA, there may be transfer or capital improvement fees
Chapter 8
How Your Savings Are Allocated
When you enter your total savings into the affordability tool, we automatically split it across the costs of buying a home. Here's how:
Down payment first
We use the minimum down payment for your loan type (5% for conventional, 3.5% for FHA, 0% for VA).
Closing costs second
The remaining savings goes toward estimated closing costs (default: 3% of the purchase price).
Reserves (leftover cash)
Any savings left over after down payment and closing costs becomes your cash reserves — a buffer for emergencies and unexpected expenses.
Why this method? It preserves your cash for emergencies. Putting more down would lower your monthly payment, but reducing your cash buffer could leave you stretched thin if something breaks or income changes.
You can always use the What-If scenarios in the tool to explore putting more down and see how it affects your monthly payment.