It’s Getting Easier to Get a Mortgage if You Have Debt, but Is That a Good Thing?

Carmen Mandato/ The Penny Hoarder

After several years of an attractive housing market, many aspiring homeowners may be delaying their plans to buy.

The Wall Street Journal reported that 1 in 5 conventional mortgage loans made this past winter were granted to people spending 45% or more of their monthly income on debt. The data, from real estate analysts at CoreLogic, focused on mortgages that met standards set by Fannie Mae and Freddie Mac.

In 2017, Fannie Mae raised its limits to insure mortgages where borrowers have up to a 50% debt-to-income ratio; the previous limit was 45%. The change creates a stronger cushion for qualified borrowers who may have student loans or other debt. But the widening borrower pool may provide a false view of whether a borrower is prepared for homeownership.

“You’d like to have everybody paying a much lower percent of their income on their housing and have a lower debt ratio, but that’s not a situation that a lot of first-time homebuyers are in,” said Robert Silverman, a professor of urban and regional planning at the University at Buffalo.

Rising interest rates also complicate borrowers’ homebuying dreams. While mortgage interest rates have dipped this spring, overall they’ve been trending higher since late 2016. An expert from the Mortgage Bankers Association predicted in a recent interview with HousingWire that mortgage interest rates will top 5% by 2020.

Student loans and other debt have many young people delaying homebuying.

If More People Can Get Mortgages, Are We In Another Bubble

Yes, we’re in a bubble, Silverman said. But it’s not quite like the one that burst 10 years ago. Home prices are rising and low inventory makes for heated competition, but lending standards are strict today compared with the period before the last crash.

But it will take some time to understand the true impact of recent tax reforms relating to mortgage interest and property tax deductions. Americans holding off on homebuying to pay off their debt could have an effect on supply and demand, too.

All those things might “put some downward pressure” on the housing market, Silverman said.

What Should You Spend on Your Mortgage?

Many lenders suggest spending no more than 28% of your gross monthly income on home costs, including taxes and maintenance. The Balance advises keeping it to 20-25% of your monthly income, depending on your current debt load. Meanwhile, financial evangelist Dave Ramsey’s mortgage calculator advises keeping your mortgage to 25% of your take-home pay.

If you spend more than 30% of your gross income on housing, Silverman said, you’re what’s called “housing cost burdened,” because the rest of your income gets stretched thinner more quickly.

“It’s gotten more problematic in the last decade or so,” he said. “More and more families are falling above that 30%.”

That 30% cap on spending on your home has long been the affordability standard, Silverman said. The Department of Housing and Urban Development uses it to determine the level of assistance for the Housing Choice Voucher Program, for example. Mortgage lenders also use it as an indicator of a borrower’s ability to repay their mortgage.

And while home prices keep going up, income growth isn’t matching it, Silverman said. That disparity could prevent many otherwise qualified borrowers from pursuing their house-hunting dreams.

Lisa Rowan is a senior writer at The Penny Hoarder.