Your Debt May Not Be a Mortgage Dealbreaker After All

Hamilton and Burr. Kanye and Drake. Freshly brushed teeth and orange juice. These are pairs never to be mixed. And generally one would say that debt and homeownership are one of these mutually exclusive pairs—but that may be changing, says a new report from the U.S. Department of Housing and Urban Development.

The Federal Housing Authority’s (FHA) annual mortgage report confirms suspicions that debt like student loans are affecting first time homebuyers’ entry into the real estate market. But rather than letting debt keep them renting, they’re now finding ways to buy homes anyways—debt and all.

According to the report, the average debt-to-income (DTI) ratio of FHA purchase mortgages hit 43.09 percent—an increase year over year for the sixth straight year, and the highest average DTI ever. Additionally the amount of higher risk FHA-insured mortgages, or those with a DTI ratio of more than 50 percent, also increased four percentage points from 2017 to 24.80 percent. For context, your DTI ratio must fall below 43 percent for most lenders to approve you for a conventional loan—the report found that the majority (54.60 percent) of those who bought FHA purchase mortgages had a DTI over this threshold.

Traditionally, FHA loans are aimed at helping those traditionally shut out of conventional mortgages achieve homeownership. Because they’re federally insured, those receiving FHA loans usually have lower credit scores and smaller down payments. Because of this, FHA loans play a large part in helping low- and moderate-income and minority home buyers purchase their first homes with financing—in fact, 33.76 percent of FHA endorsements went to minority borrowers in 2018. In total, the FHA has given out more than 47.5 million mortgages—or 12.10 percent of single-family residential mortgage originations—since its inception in the 1930s.

While this jump in DTI may seem shocking, this isn’t just happening with FHA loans. Across the board, mortgage approval standards seem to be relaxing. This past June, an analysis by CoreLogic found that so percent of all conventional conforming loans were going to traditionally “risky” borrowers. This change can largely be linked to the overall slowing of the housing market. And since more millennials have larger sums of debt because of student loans and stagnant wage growth, banks need to widen their applicant pool so people still apply and purchase mortgages.

Another interesting nugget in the study? More FHA-applicants are getting financial assistance from families while securing their mortgage. In 2018, 26.16 percent of borrowers received a gift fund from an eligible family member. It’s no surprise that millennials largely need financial help from friends and family members in order to purchase property because it’s hella expensive. In fact, Zillow reported in December that 54 percent of urban buyers are using financial gifts from family members or friends to help cover the down payment.

But it is somewhat unexpected to find out that such a large portion of FHA-applicants are receiving financial assistance—since the mortgage is aimed at helping financially disadvantaged applicants build wealth through homeownership. One interpretation of this data could be that those who traditionally would be able to get a conventional loan with parental help must now purchase with an FHA loan because of student loan debt, fewer financial assets, low credit scores, and super expensive home prices—four factors plaguing the millennial market. And if that is true, that means many of the already financially disadvantaged who would have benefitted from FHA loans could be pushed out of the home buying market completely since they don’t have access to outside financial assistance.

Either way, this increase shows how much harder it has become for first time homebuyers to get a mortgage in what older generations would consider a “traditional” or less-risky way. They do what they can.