30
DTI'S TIES TO
MORTGAGE
DEFAULT RATES
In an effort to reduce future defaults on
FHA-insured mortgages, the Federal Housing
Administration (FHA) has signaled that it
may tighten credit, noting that the debt-to-
income (DTI) ratio for FHA-insured loans
has been consistently increasing for six years.
In a new report, Urban Institute examined
how important DTI ratios are in predicting a
borrower's ability to make on-time mortgage
payments, and how debt burden impacts ability
to repay FHA mortgages.
According to Urban, DTI ratios are much
less significant predictors of loan performance
than FICO scores and that many high-DTI
loans have strong FICO scores. Additionally,
Urban's analysis found that higher-DTI loans
do not always have higher serious delinquency
rates, and 5.6% of loans with DTI ratios
ranging from 0 to 35% have been seriously
delinquent at 60 months of age, compared with
7.6% of loans with DTI ratios of 35–45. But
for loans with DTI ratios greater than 50, the
D90+ rate at 60 months is 6.9%, lower than
those with DTI ratios of 35–45.
On the other hand, loans with lower
FICO scores—and loans with higher loan-to-
value (LTV) ratios, for that matter—always
have higher serious delinquency rates. e
magnitude of impact on delinquency rates is
much larger than on DTI ratios, ranging from
3.3 to 12%. For FICO scores, the proportion
of loans that was ever D90+ delinquent at 60
months ranged from 3.3% for loans with FICO
scores greater than 780 to 12% for loans with
FICO scores less than 620, or a factor of 3.5.
Urban concludes that there is no question
that higher-DTI loans default at higher rates
than low-DTI loans, but even in the FHA
market, the relationship is weak. FICO scores
are much stronger predictors of default than
DTI ratios.
"Also, it appears that the current FHA
scorecard adequately captures DTI ratios,
requiring compensating factors for high-
DTI ratios," Urban said. "If the FHA were
to place further restrictions on DTI ratios, it
would not benefit the FHA and would make
obtaining mortgage credit more difficult for
two important groups: millennials with student
loan debt and communities of color, who
generally have lower incomes."
GENERAL CONTRACTORS
ASPEN
Renovating
Chicagoland
since 1997
aspen@aspengen.com
708-579-0600
