Could that shiny new car you just financed with a big dealer loan or lease put a damper on your ability to refinance your mortgage or move up to a different house? Could your growing debt load — for autos, student loans and credit cards — make it tougher to come up with all the monthly payments you owe?
Absolutely, and some mortgage and credit analysts are beginning to cast a wary eye on the prodigious amounts of debt American homeowners are piling up. New research from Black Knight Financial Services, an analytics and technology company focused on the mortgage industry, reveals that homeowners’ non-mortgage debt has hit its highest level in 10 years.
New debt taken on to finance autos accounted for 81 percent of the increase, a direct consequence of booming car sales and attractive loan deals. The average transaction price of a new car or pickup in April was $33,560, according to Kelly Blue Book researchers.
Student loan debt also is contributing to strains on owners’ budgets. Those balances are up more than 55 percent since 2006. Credit card debt is another factor, but it has not mushroomed like auto and student loans. Nonetheless, homeowners carrying balances on their cards owe an average $8,684, according to Black Knight data.
The jump in non-mortgage debt is especially noteworthy among owners with Federal Housing Administration (FHA) and Veterans (VA) home loans. These borrowers, who typically have lower credit scores and make minimal down payments — as little as 3.5 percent for FHA, zero for VA — now carry non-mortgage debt loads that average $29,415. By contrast, borrowers using conventional Fannie Mae and Freddie Mac financing have significantly lower debt loads — an average $22,414 — but typically have much higher credit scores and have made larger down payments.
Is there reason for concern here? Bruce McClary, vice president at the National Foundation for Credit Counseling, believes there could be if the debt-gorging pattern continues.
“Some people have lost sight” of the ground rules for responsible credit and are “pushing the boundaries,” he told me last week. For example, McClary says auto costs — monthly loan payments plus fuel and maintenance — shouldn’t exceed 15 percent to 20 percent of household income. Yet some people who already have debt-strained budgets are buying new cars with easy-credit dealer financing that knocks them well beyond prudent guidelines.
According to a recent study by credit bureau Equifax, total outstanding balances for auto loans and leases surged by 10.5 percent in the past 12 months. Of all auto loans originated through April of this year, 23.5 percent were made to consumers with subprime credit scores.
Ben Graboske, senior vice president for data and analytics at Black Knight Financial Services, cautions that although rising debt loads may look ominous, there is no evidence that more borrowers are missing mortgage payments or heading for default. Thanks to rising home-equity holdings and improvements in employment, 30 day delinquencies on mortgages are just 2.3 percent, he said in an interview, the same level as they were in 2005, before the housing crisis. Even FHA delinquencies are relatively low at 4.53 percent.
But Graboske agrees that there are other consequences of high debt totals that could limit homeowners’ financial options: They “are going to have less wiggle room” when it comes to refinancing their current mortgages or obtaining a new mortgage to buy another house.
Why? Because debt-to-income ratios are a crucial part of mortgage underwriting and are stricter and less flexible than they were a decade ago. The more auto, student loan and credit card debt you’ve got along with other recurring expenses such as alimony and child support, the tougher it’s going to be to refinance or get a new home loan.
If your total monthly debt for mortgage and other obligations exceeds 45 percent of your monthly income, lenders who sell their mortgages to giant investors Fannie Mae and Freddie Mac could reject your application for a refi or new mortgage, absent strong compensating factors such as exceptional credit scores and substantial cash or investments in reserve. FHA is more flexible but generally doesn’t want to see debt levels above 50 percent.
Bottom line: Before signing up for a hefty loan on that new car, take a hard, sober look at the impact it will have on your debt-to-income ratio. When it comes to what Graboske calls your mortgage wiggle room, less debt, not more, may be the way to go.
Kenneth Harney is executive director of the National Real Estate Development Center.