For much of the COVID-19 pandemic, favorable financial conditions for many middle and upper-income households have brought a rush of new homebuyers into the real estate market. In 2020 and 2021, increased savings rates and government stimulus allowed millions of people to pay down debts from credit cards, student loans, and other consumer borrowing, while more recently, a tight labor market has helped boost wages. Both of these factors have helped prospective homebuyers improve on one of the key metrics that mortgage lenders consider when evaluating mortgage applications: the debt-to-income ratio.
The debt-to-income ratio is calculated as an individual’s monthly debt payments divided by their monthly income. As regular debt payments increase relative to income, an individual’s ability to pay debts while also covering their other expenses becomes more challenging. For that reason, lenders evaluate debt-to-income ratios when approving loan applicants to ensure that borrowers will be able to make payments reliably.
Debt-to-income ratio is especially important for mortgage approvals. Housing costs are the most significant regular expense for most households, so lenders want the assurance that an applicant’s debts and income level will not limit their ability to make payments on a home loan. According to data from the Home Mortgage Disclosure Act, 31.2% of mortgage applications are denied due to the applicant’s debt-to-income ratio. Debt-to-income levels trail only credit history (32.1%) among leading reasons for home purchase loan denials.
Lenders may vary in what they view as an acceptable debt-to-income ratio for different applicants, but one key threshold in the industry is a 43% debt-to-income ratio. The 43% figure is significant because it is the highest level that a borrower can have while receiving a Qualified Mortgage, a federal designation that limits risky loan terms for borrowers. Mortgage approval rates drop off significantly when applicants’ debt-to-income ratios rise much above that level. More than 90% of loans are approved with applicant debt-to-income ratios of 49% or less, compared to just 33.5% of those with ratios between 50% and 59% and just 6.2% of those with ratios above 60%. And even those who are able to be approved with higher debt-to-income ratios likely will pay greater interest rates.
Due to geographic differences in income levels and cost of living, some locations in the U.S. have higher debt-to-income ratios—and more mortgage approvals at higher levels—than other states. States with the most expensive housing, including Hawaii and California, are among the leaders in mortgage approvals at higher debt-to-income ratios because applicants’ existing mortgage payments may be more costly. Most of the other top states with high debt-to-income ratios are also located in the West, with the exception of Florida, which ranks fourth among states for approvals with debt-to-income above 36% and above 43%. And at the local level, the cities with the highest debt-to-income ratios are also most commonly found in states where higher debt-to-income ratios are the norm.
The data used in this analysis is from the Federal Financial Institutions Examination Council's Home Mortgage Disclosure Act. Only conventional home purchase loans originated in 2020 were considered. To determine the locations with the highest debt-to-income ratios, researchers at Construction Coverage calculated the share of home purchase loans with a debt-to-income ratio of more than 36%. In the event of a tie, the location with the higher share of home purchase loans with a debt-to-income ratio of more than 43% was ranked higher.
The analysis found that in Georgia, 43.2% of home purchase loans have a debt-to-income ratio over 36%, while 16.6% have a debt-to-income ratio over 43%. Out of all states, Georgia has the 20th highest share of home purchase loans with debt-to-income ratios over 36%. Here is a summary of the data for Georgia:
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Share of home purchase loans with >36% DTI: 43.2%
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Share of home purchase loans with >43% DTI: 16.6%
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Home purchase loan approval rate for >36% DTI: 79.1%
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Home purchase loan approval rate for >43% DTI: 65.3%
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Home purchase loan approval rate for all loans: 84.1%
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Median interest rate across all home purchase loans: 3.25%
For reference, here are the statistics for the entire United States:
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Share of home purchase loans with >36% DTI: 44.0%
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Share of home purchase loans with >43% DTI: 17.0%
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Home purchase loan approval rate for >36% DTI: 82.3%
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Home purchase loan approval rate for >43% DTI: 70.1%
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Home purchase loan approval rate for all loans: 86.3%
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Median interest rate across all home purchase loans: 3.25%
For more information, a detailed methodology, and complete results, you can find the original report on Construction Coverage’s website: https://constructioncoverage.com/research/cities-with-the-highest-debt-to-income-ratios-2022
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