Once every quarter, the Department of Housing and Urban Development (HUD) creates a report for Congress that shows how the FHA loan program is doing in several key areas. Their latest report, published back in June, showed that FHA borrowers in Washington State and nationwide have higher debt-to-income ratios today than in past years. The average DTI was 43% during the second quarter of fiscal year 2018.
Debt and Income Trends for FHA Borrowers in Washington
The FHA loan program is a popular financing method among home buyers in Washington. It’s particularly favored by first-time buyers, due to the low down payment and flexible qualification criteria that are allowed.
Definition: The debt-to-income, or DTI, is a percentage that compares the amount of money a person or household earns each month to the amount they spend on their recurring debts (credit cards, auto loans, mortgage, etc.) Example: A person who spends 40% of her gross monthly income on her various recurring debts has a combined debt-to-income ratio of 40%.
There are some general debt and income requirements for Washington home buyers who want to use the FHA loan program. The gist of them is that borrowers should have a manageable level of debt based on their monthly income, along with the financial capacity to make the monthly payments.
Over the last few years, the average debt-to-income ratio among FHA loan borrowers in Washington State and nationwide has crept upward. During the last quarter of 2012, for example, the average DTI ratio among borrowers was 40.1%. During the second quarter of 2018, that average had risen to 43%. This suggests it has become easier to qualify for an FHA-insured mortgage loan in Washington with a comparatively high level of debt.
Here’s another relevant quote from the HUD report: “The proportion of borrowers with DTI ratios above 50 percent increased from 23.0 percent in 2018 Q1 to 24.9 percent in 2018 Q2.”
This means that about one-fourth of all FHA borrowers during the second quarter of this fiscal year had debt-to-income ratios above 50%.
A More ‘Forgiving’ Mortgage Program?
Most mortgage programs have some kind of limit when it comes to the borrower’s debt-to-income ratio. But with the FHA program, it’s more of a “soft” limit. There are several compensating factors that could offset a higher debt level.
This might be part of the reason why the average DTI ratio has gone up over the last few years. It’s also why some home buyers in Washington choose FHA loans to begin with. The program can be appealing to borrowers with credit and/or debt issues that might prevent them from qualifying for other financing options.
But FHA isn’t the only mortgage program where standards have eased. The qualification criteria for conventional loans (which are not insured by the government) have also eased in recent years. This is something we’ve reported on in the past. Fannie Mae and Freddie Mac, the government-sponsored companies that buy home loans, have both increased their debt-to-income ratio limits to 50%.