High rate of mortgage denials may push South Floridians into payday loans

Inside Subprime: April 30, 2018

By Holly Kane

South Florida is one of the nation’s leading regions in mortgage application denials, making the area a prime market for payday loans in Florida.

South Florida, which covers metropolitan Miami, carries a mortgage denial rate of 11 percent, according to a recent study, which examined more than 10 million mortgage applications from the Federal Financial Institutions Examination Council.

The primary reason for denial in South Florida is the area’s higher than average debt-to-income ratio, a term which refers to a person’s total monthly debts divided by their monthly gross income. According to the Consumer Financial Protection Bureau, most Qualified Mortgages require this number to be below 43 percent to ensure the borrower has the ability to repay the loan.

Further, the study found that debt-to-income ratio as a reason for denial is disproportionately higher in South Florida than the national average, which could have to do with the city’s high cost of living. The ideal income to live comfortably in Miami is about $77,000, while the median income is about $31,000, according to a 2016 study by Go Banking Rates.

If they were making $2,500 a month, a South Floridian’s debt payments would have to be $1,100 or less in order to qualify for a mortgage, leaving $1,400 a month in an area with a median rent of about $2,000, according to Zillow.

Saddled with debt and battling a high cost of living, some Floridians may turn to less traditional lending practices to bolster their cash flow. With payday lender storefronts outnumbering Starbucks locations in the state, payday loans in Florida offer a seemingly easy way out of debt.

However, about two-thirds of payday loan borrowers earn less than $30,000 a year, according to a 2013 study by the CFPB. Although payday loans seem like an easy fix, paying them back is another story. Most lenders require access to a bank account to ensure funds can be appropriated on payday before the borrower has a chance to pay other bills.

According to the CFPB, “your ability to repay the loan while meeting your other financial obligations is generally not considered by a payday lender.”

Borrowers usually end up paying more in fees than the principal amount of the loan. In 2014, payday lenders in Florida collected more than $300 million in fees from Florida borrowers, according to the Center for Responsible Lending.

“Historically, a full 88 percent of repeat payday loans in Florida are originated before the borrower receives their next two‐week paycheck,” wrote the Center for Responsible Lending in a 2016 report, and this is a figure that suggests payday loans do not help borrowers out of debt.

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