Debt-to-income (DTI) ratios are on the decline, loan-to-value (LTV) ratios are on the rise, and average credit scores for conventional conforming home loans ticked up as of Q3 2019, according to the latest data from CoreLogic [1].
The average DTI for conventional conforming loans was 36% for Q3 2019, down one point from a year earlier. CoreLogic noted that this shift may be a result of a “relaxing of affordability pressures” as mortgage rates eased in 2019.
Mortgage rates declined over the first three quarters of the year and were down 1 percentage point on an annual basis in the third quarter of the year.
LTV ratios averaged 83% in the quarter—up one point from a year ago.
CoreLogic noted that “credit-risk attributes of borrowers have shown dramatic variation in the last 20 years,” but that while DTI and LTV ratios have relaxed overall, “there has been no change in credit score standards.”
Also, the high DTI and LTV loans tend to be fully documented “and thus are different than the pre-housing crash high DTI and LTV loans,” many of which were low or no-documentation loans.
Over the past few years, new policies loosening credit standards for the GSEs have helped push average DTI and LTV ratios up for conventional conforming home loans.
Fannie Mae changed its DTI limit from 45% to 50% in July 2017. From 2012 up to the announcement of this change, the share of conventional conforming loans with DTIs above 45% ranged between 5% and 7%. It rose to a high of 21% in the Q4 2018 and has been dropping over the past year.
The GSEs also loosened LTV standards, leading to a rise in LTV ratios. Fewer than 2% of conventional conforming loans had LTV ratios higher than 95% in 2014. In Q2 2019, the share was 12%.
However, while LTV and DTI ratios are relaxing, credit scores are not. Today’s borrowers have much higher credit scores than those borrowing before the housing crash. In 2001, the average credit scores for home purchasers was 705. As of the third quarter of 2019, the average credit score was 754, significantly higher than pre-crisis levels and two points higher than a year earlier.