WASHINGTON (7/22/14)--More than a high credit score or sizeable down payment, boasting a safe debt-to-income (DTI) ratio best positions a consumer for success when applying for a mortgage, a FICO survey has found (The Washington Post July 18).
Nearly 60% of risk managers polled for the study said that when assessing a mortgage applicant, excessive DTI was their No. 1 concern. Having multiple credit applications out and poor credit scores came in second and third respectively, though DTI came in five times higher than any other response.
DTI ratios first compare a consumer's gross income with potential housing expenses, including principal payments, interest, taxes and insurance. The second piece of the ratio, called the back-end ratio, measures income against all other recurring monthly debt, such as housing expenses, credit cards, student loans and other personal loans.
Together, DTI helps elucidate whether the prospective home-buyer will have enough cash available, given other debt, to make mortgage payments each month.
Lenders prefer to see a housing-expense ratio, the first component, fall under 28%, according to The Washington Post. In May, the average borrower to obtain a mortgage through Freddie Mac and Fannie Mae held a housing-expense ratio of 22%.
Under federal qualified mortgage standards, the highest acceptable income-to-recurring debt ratio, or the back-end ratio, is about 43%.
The average back-end ratio for borrowers who secured a mortgage in May was 34%, according to Ellie Mae. The Federal Housing Administration reported the average denied applicant had a 47% back-end ratio.
A qualified mortgage is a type of loan that carries stable terms that are geared to ensure the borrower can afford pay off the loan.