Considerations While Underwriting The Low to Moderate Income Borrower

Written By: Bonnie Wilt-Hild

The most recent past has seen the mortgage industry struggle with developing sound underwriting practices that serve to not only protect lenders against default, but to also promote affordable home ownership for all types of borrowers. As many underwriters are aware, credit overlays where all lending programs are concerned have become more of an industry standard than standard industry practices are. Gone seem to be the days where from an underwriting standpoint we could assess the overall case file risk and determine what compensating factors, if any, were present to mitigate that risk. Unfortunately, these practices as instituted have had a negative impact on the low to moderate income borrower.

As the federal government struggles with issues such as privatization of FNMA and FHLMC and what further effects this might have on the underserved populations, we as underwriters find ourselves faced with a dwindling ability to adequately assess these cases as they should be assess while feeling almost forced to exact credit overlays that seem to be more applicable to the segments of the population that in all actually have little or no trouble qualifying under normal mortgage qualifying guidelines.

As we consider they typical things from an underwriting standpoint that we might apply to the average borrower such as LTV, ratio’s, credit qualify and perhaps reserves after closing, it is quite disconcerting that these things as they apply to mortgage underwriting principals are slowly becoming the norm where credit overlays and qualifying are concerned. It is disconcerting because not all borrowers fit into the same box and more over, it is taking a serious toll on the already underserved segments of the population.

Now I know a lot of you are thinking that I have completely lost my mind, particularly if you have ever joined me for an underwriting class so I am going to ask you for a moment so that I can explain. As with all cases, many considerations are given to each case in order to develop overall acceptability from a mortgage credit risk standpoint, however if we do not further consider the type of borrower being underwritten, we fail considerably. Mortgage credit risk assessment must take into consideration the socioeconomic background of the borrower in order to determine if the borrower is an acceptable or unacceptable risk and a single set of credit overlays is not sufficient to serve all segments of the population where assessing that risk is concerned, it would akin to comparing apples to oranges. Let’s consider the low to moderate income borrower who might have limited if no reserves after closing who may well be receiving a grant in order to meet minimum required investment criteria. From an underwriting standpoint, many of you may be thinking that this poses an heightened risk as the borrower has “no skin in the game”, but I disagree. It is plausible for a low income borrower to have little in the way of reserves or savings because of the mere residual income factor.

Limited income results in limited reserves. However if that borrower has a documented rental history say paying the same monthly payment as the proposed monthly mortgage payment, as well as an acceptable credit history and employment history, it should be reasonable to determine that the borrower should make timely monthly payments on the mortgage providing the property being purchased is well within a comfortable price range for that borrower. The larger consideration should be payment shock and/or residual income, not reserves after closing. So implementing a credit overlay such as 2 months PITI in reserves after closing really serves no purpose for these types of borrowers and could also contribute to disparate lending practices where impact or effect on prohibited bases is concerned.

Additionally, socioeconomic factors such as the borrowers spending habits also play a large role. Lower income borrowers tend less to incur significant debts in terms of revolving credit as they do not possess the disposable income to maintain the debts and from a social standpoint they do not require several of the goods and services that might be required by a borrower with significantly greater income. In short a back yard BBQ costs significantly less than say a dinner party for 12 at which Steak au Poivre is the main course. Back yard BBQ’s require paper plates and plastic utensils, Steak au Poivre, a nice set of china, a place setting for 12 of your finest crystal and don’t forget the Cognac for the au Poivre sauce.

In closing I want to reiterate the importance of exercising common sense when underwriting a borrower who may not fit a tight little generic mold where industry standard is concerned. More often than not, these borrowers are just as deserving of a mortgage then those that fit nicely into the plain vanilla box, it just takes a little more thought where qualifying is concerned. As always, have a good week and happy underwriting.

About The Author

Bonnie Wilt-Hild - As an NAMP® staff writer, Bonnie currently serves as a senior instructor for FHA Online University ( as well maintains a full-time mortgage underwriting position as the Senior FHA DE Underwriter for a major lending institution. With over 25+ years of senior-level FHA/VA Government underwriting experience, Bonnie is considered the "Queen of FHA Loans". If you're interested in becoming a writer for NAMP®, please email us at:

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