Summary: The excitement of a new home purchase can sometimes override wisdom and prudence when…
Summary: If you are applying for an FHA loan to buy a house, your debt-to-income ratio will be assessed. According to data, the average DTI has been increasing among borrowers. This article will explain more.
FHA loans are attractive loan options for home buyers because of their low credit score and down payment requirements. That said, buyers still have to get approved for an FHA loan, and part of the process involves lenders verifying debt-to-income ratios.
This ratio helps lenders determine whether or not a borrower would be able to handle an additional debt. A lower DTI is better, as it leaves more income to pay for a mortgage. But the average DTI among FHA borrowers has been increasing over the years.
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%. Today, that average is about 43%.
This suggests it has become easier to qualify for an FHA-insured mortgage loan in Washington with a comparatively high level of debt.
Related: Average credit score among borrowers
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%.
Need a Mortgage?
If you are in need of a home loan to buy a house, we would love to help. Sammamish Mortgage has been serving borrowers across Washington, Colorado, Idaho, and Oregon since 1992. We offer a variety of mortgage programs with flexible criteria. Please contact us if you’d like to learn more about your mortgage financing options, or to receive a rate quote.