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The New Lending Paradox
The thought of applying for a mortgage can induce fear in some. Many potential first-time homebuyers ruminate on this important decision, with much of the hesitation derived from the endless articles and news stories about how easy or hard it is to get a mortgage. HousingWire spoke with numerous mortgage industry executives to find out what’s really going on in the mortgage underwriting world and what they would do to change it. Three truths were identified as needing more clarification:
1. Low income buyers have it easy. Buyers with poor credit and low income find it quite easy to buy a home below the FHA limit.
2. Affluent buyers have it hard. Automated underwriting keeps many highly qualified borrowers from getting a mortgage because of their income means not fitting in the traditional credit box.
3. Industry executives are unintentionally preventing a housing recovery. They’re reminiscing about the good old days of higher FHA limits, lower fees and easier documentation. This yearning for the past looks unreasonable to unsympathetic regulators and politicians in the new regulatory world.
See Exploring Millennial Home Buying Hesitancy
See Mortgage Credit Crisis or Potential Buyer Fears?
If potential home-buyers clearly understood the points above, the market should see:
Many qualified people do not think they could get a mortgage, so they don’t try.
If underwriters were allowed to use good business sense instead of automated forms, more loans would be made to those commissioned salespeople, retirees, self-employed and newly employed.
Many relocated employees are renting simply because they lack paystubs showing adequate employment time with their new employer. Steady employment and desirability to several employers should drive the application decision-making.
In the new mortgage credit world, with the last vestiges of the housing crisis long gone; we are lending aggressively to lower income borrowers and more conservatively to the affluent. First-time buyers should be made aware of the current home-buying programs and bankers should use more good judgment and less automated underwriting so more non-traditional affluent buyers can get a mortgage.
FHA insures 95 percent plus loan-to-value (LTV) mortgage loans made to people with low incomes and poor credit. Here’s an example of a recently approved loan:
96.5% loan on a $170,000 house, with $36,000 yearly income, a foreclosure three years ago contributes to a 620 FICO score and debt service equaling 55% of their gross income
Affluent buyers with non-traditional incomes have tremendous difficulty getting a mortgage because of inconsistent income-reporting to the IRS, bank cash-holding and insufficient income history from a new employer. Here’s an example of a well-qualified borrower who was denied a mortgage:
Recently retired couple with 801 credit score, $1 million in retirement accounts, and $400,000 in savings in which they were going to put down $350,000 on a $550,000 home purchase, their Social Security income was less than double the proposed mortgage payment.
Disposable income is more important than gross income. One mortgage industry insider underlines the importance of the industry putting more focus on disposable income versus debt-to-income ratios. A borrower making $2,200 a month with a 40 percent DTI ratio is more risky than a person making $12,000 a month with a 50 percent DTI ratio. The first borrower would have less left over after paying their other debts.
While there’s not a shortage of suggestions from industry executives on how they think banks should make mortgage loans, lenders should focus on the paradox in today’s lending environment. Get the word out that loans below the FHA limit are available, with monthly payments that are a great value compared to gross incomes. Bankers should be allowed to use manual underwriting in situations where they can document that the loan has a very low likelihood of default.
HousingWire. “The truth about mortgage underwriting” 19 August 2014. http://www.housingwire.com/blogs/1-rewired/post/31058-the-truth-about-mortgage-underwriting