Evaluating Higher than Standard Housing and Debt Ratios

Written By: Stacey Sprain, Op-Ed Writer

One thing I continue to remind folks of in today’s world of credit risk is that an AUS approval isn’t always a sure thing. We still have an obligation to manually evaluate the layering of various credit risks in our loan files if we intend to consciously keep our overall risk and defaults to a minimum.

Automated underwriting systems only have the ability to analyze certain data elements and certain combinations of data elements. They don’t have the ability to communicate “gut instincts” or the common sense that is required in certain situations which is something we all need to keep in mind when questioning whether or not we should rely on an AUS Accept/Approve decision on a high risk loan situation.

Though many lenders maintain their own credit overlays that cover maximum housing and debt-to-income expense ratios that they allow on their particular products and programs, not all of them do so. Many of then leave it wide open which puts the responsibility on us to utilize common sense when we evaluate loans with high qualifying ratios. Here are some tips to help when analyzing high ratio situations.

Compare the current housing expense to the proposed housing expense. Is there a substantial increase proposed? If so, does the borrower demonstrate a clear ability to handle the proposed increase in housing expense? Is there a past savings pattern present? How does the borrower’s credit profile stack up considering the existing housing expense? If there are derogatory accounts, does it make sense that the borrower will be able to maintain good credit with the proposed increase to housing expense?

Take a look at the borrower’s credit profile. Does the credit report provide any evidence of recent derogatory credit? Are the open accounts established with long periods of payment history or are there an abundance of newly opened accounts with minimal repayment history? (Keep in mind that a higher than average DTI on a loan where the borrower has minimal repayment history on numerous newly opened accounts should be considered high risk, especially if the proposed housing expense is increasing substantially. The borrower’s credit therefore doesn’t demonstrate a long-term history of the borrower’s ability to manage such a high ratio of payments with the earnings history that is present at the time

Look at the Employment and Earnings History. Does the borrower’s employment history demonstrate stability? Is there any question as to whether or not the earnings being used to qualify the borrower would be in question at any point in the near future? Is it reasonable to expect that the current earnings trend will continue and that it can accommodate the housing expense and overall debts and liabilities reflected with the borrower’s credit profile and proposed housing expense? Even though not counted in qualifying, is it reasonable to expect that the borrower has enough disposable income to add the responsibilities of maintenance and utility expenses for the property in addition to the mortgage payment and all other current debts and liabilities?

Review Assets, Savings Patterns and Reserve Funds. Is downpayment coming from the borrower’s own funds or is it being gifted, granted or borrowed? Does the borrower demonstrate responsible savings patterns? Will any reserves remain after the closing that borrower can fall back on should he/she run into personal issues keeping up with the responsibility of housing and other expense payments? Will the borrower have the ability to continue saving at the same rate upon the purchase or refinance of this property?

Bottom line- What remains as disposable income after the proposed housing payment and current debts are subtracted from the borrower’s NET earnings? Is it realistic that the borrower can handle the maintenance and upkeep of the home with what is left?

It’s important not to simply rely on an automated underwriting approval as a guarantee of loan approval when a loan includes a borrower with higher than average housing expense ratio and debt to income ratio. These situations need to be evaluated and analyzed further. When in doubt be sure to address the concern by requesting a written explanation from the borrower so that you can show due-diligence with addressing and not ignoring the concerns.

About The Author

Stacey Sprain - As an op-ed writer, Ms. Stacey Sprain is currently a NAMP® Certified Ambassador Loan Processor (NAMP®-CALP). With over 15+ years of mortgage banking experience, Stacey is also a Quality Control Manager for a major mortgage lending institution. 

Opinion-Editorial (Op-Ed) Disclaimer For NAMU® Library Articles: The views and opinions expressed in the NAMU® Library articles are those of the authors and do not necessarily reflect any official NAMU® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMU®. Nothing contained in this articles should be considered legal advice.