Credit Score Better Predictor of Loan Risk Than DTI

The Urban Institute research documents in How Debt Burden Affects FHA Mortgage Repayment in Six Charts that credit scores are a better predictor of loan risk than DTI ratios.

Specifically, as the chart above shows, credit scores 660 or above have far less delinquencies that DTI ratios 35% or below, an industry standard.  In fact, regression analysis by the Urban Institute research credit scores have three times more explanatory power in explaining loan risk than DTI ratios.

The distinction is critical because their research shows over half of consumers with DTI above 45%, a traditional indication of high risk, have credit scores in the prime credit range.  Loan risk is much more defined by the credit score than the DTI for a large group of consumers. 

Of course, FICO scores assess as part of the scoring the total debt obligations a consumer has.  But it better defines specifically how a consumer handles their debt obligations.  They may well use debt more heavily taking more of their income than average consumers, but credit scores define how responsibly they handle that debt and available income to handle more debt.  By credit score model definition, customers with better credit scores have debt capacity, a proxy for available debt-to-income.

Our digital lending clients have complete control of underwriting and use credit score as one factor in documenting risk.  The above research documents why our client chief credit officers look to borrower credit scores first to assess ability to repay along with documented income and cash flow.