How Can 35% of People Buy a Home?

There's a rather disturbing statistic hitting the news this morning. The Associated Press reported more than 35 percent of Americans have debts and unpaid bills that have been reported to collection agencies, according to a study released today by the Urban Institute.

That means that more than one-third of U.S. citizens have a lousy credit score. As we tighten credit guidelines in the mortgage industry, forget about income, debt-to-income ratios, assets, capacity, character or collateral. More than one-third of Americans can't afford or qualify to buy a home. How can they if they're going to a collections agency? They might already have a mortgage, but where is the new one going to come from?

The Urban Institute's Caroline Ratcliffe told AP that stagnant incomes are key to why some parts of the country are struggling to repay their debt. Incomes are not keeping up with inflation and, therefore, people are making less money. The study found southern and western states hit hardest by this phenomenon, including Texas and Florida. Locations like San Jose, Calif., and Boston, had a lower percentage of debt heading to a collections agency.

Let's hope there isn't another tech bubble out there, or that 35% is likely to rise another 10% to 15%.

As for the mortgage industry, some of these 35% might even have problems getting into an apartment much less a home. On the bright side, 65% of Americans are not called by a collections agency. The question is: how much debt do they have and can they qualify under a 43% debt-to-income ratio?

The American Bankers Association said people "increasingly pay off balances each month. Just 2.44 percent of card accounts are overdue by 30 days or more, versus the 15-year average of 3.82 percent." They're not overdue, but are they paying the minimum amount each month. That's what's still getting counted on the mortgage application--the minimum amount paid each month.

Therefore, a good credit score and credit cards paid on time applies to a maximum of 62.56% of Americans who need to have a 43% debt-to-income ratio, including the mortgage payment. They also need to have a good, consistent income to make the monthly payments and enough savings to put down at least 5% on a home.

Mortgage credit is going to need to loosen up a little to get more people into homes. It doesn't look like that's going to happen anytime soon.

--RM