Debt To Income Ratios Rising Among Buyers

By Kurt Real Estate Nov 23, 2019

About one in five conventional mortgage loans issued this winter went to borrowers who spent more than 45 percent of their monthly incomes on their mortgage payment and other debts. This is the highest proportion since the housing crisis, according to CoreLogic, a real estate data firm. Furthermore, that is nearly triple the proportion of such loans issued in 2016 and the first half of 2017. The amount of money borrowed is going up, and so is the amount of people borrowing it.

Real estate professionals are concerned that a growing number of buyers are getting priced out of the housing market. Besides rising home prices, the average 30-year fixed-rate mortgage has increased to 4.4 percent, compared to 3.95 percent at the beginning of the year, according to Freddie Mac. Interest rates and prices are working against the average home buyer.

Rising mortgage rates “are working against housing affordability and that’s why you get the pressure to ease credit standards,” says Doug Duncan, Fannie Mae’s chief economist. That’s leading mortgage financing giants Fannie Mae and Freddie Mac to test programs aimed at making homeownership more affordable. For example, they’re experimenting with backing loans made by lenders who agree to help pay down a buyer’s student loan debt or programs that ease standards so that self-employed borrowers can get a mortgage more easily. The problem with lowering credit standards for buyers is that people will start buying houses that they can barely afford and, if interest rates go up, they could default on the loan; much like what happened in the market crash in 2008.

Last summer, Fannie Mae and Freddie Mac started to back a greater number of loans from borrowers with debt-to-income ratios of up to 50 percent (45 percent was usually the typical limit prior). Fannie’s new policy has added 100,000 new mortgages that wouldn’t have otherwise been made last year and early this year, according to the Urban Institute. This type of lending could be disastrous for the housing economy.

Housing analysts say that lenders need to be careful in opening the credit box too much, as such actions helped exacerbate the last housing crisis. Still, the share of new buyers with debt-to-income levels in the 46 to 50 percent range remains well below the peak of 37 percent in 2007. However, it is nearing the levels of 2004 to 2005, CoreLogic notes. Another differentiating factor is that borrowers today tend to have a better credit history and higher credit scores (700 or more), according to Inside Mortgage Finance. Leveraging too much debt can be a bad thing, but leveraging the right amount can actually bring affordability up.