The Unspoken Rule

Written By: Bonnie Wilt-Hild
Senior DE Underwriter & NAMP Instructor

We are all aware of the written underwriting guidelines that determine how we ultimately qualify our borrowers. In every case, we are required as underwriters to determine willingness as well as capacity to repay as well as determine if the collateral as presented supports the loan amount being applied for. Through the underwriting process we collect documentation from our borrowers in order to determine that the borrower’s credit reputation is acceptable, that their monthly income as presented is acceptable to manage the debt being applied for and of course the fair market value of the subject collateral supports the loan amount.

From an underwriting standpoint we look at credit scores, DTI and HTI ratio’s as well as appraised value. If due diligence is performed we will also analyze the borrowers savings pattern, their use of consumer credit and hopefully, their residual income. That’s correct, the unspoken rule of residual income. I do realize that our DTI and HTI ratio’s are based on the borrower’s gross monthly income however, it is extremely important to analyze the borrowers residual income in each case to determine capacity to repay. There are several pieces to the mortgage puzzle that believe it or not, we as underwriter are not privy to but certainly need to think about when are underwriting a case particularly is the borrower is demonstrating somewhat excessive ratio’s.

Take for instance a case where the borrowers ratio’s as represented are 37/48. On the surface these ratio’s do not seem too terrible however, in some cases when you consider the overall financial picture of the borrower, could be pretty excessive. Let’s consider a borrower whose annual income is $55,000.00 who wants to purchase a property where the PITI will result in a monthly payment of $1695.84 monthly.

Additionally the borrower’s monthly debt is $505.00 which includes a new car payment of $394.00. When determining the borrower’s gross monthly income at $4583.34 it is also noted that their federal, state and fica deductions are $1461.00 monthly reducing the borrowers bring home after taxes to $3122.34. In addition, the borrowers is married with 2 dependents and carries health insurance through his employer which costs him $132.00 bi weekly for a total of $286.00 monthly reducing his monthly residual to $2836.34. Now this is pretty conservative in terms of deductions and does not take into consideration any monthly 401k contributions or maybe dental or life insurance.

Just with these basic deduction are final scenario is this: $2836.34 – 1695.84 (housing) = $1140.50 remaining residual income. Further subtract the borrowers debts of $505.00 and the remaining residual will be $635.00. This is the amount of money this borrower will leave over each month to pay car insurance, utility bills, food and clothing expense as well as make any needed repairs to the subject property. Lets also think about gas prices and the borrowers commute to work, is it 5 miles or 30 miles because this does make a difference in how much money the borrower will need to fill his gas tank and when you consider a monthly of residual of $635.00 every penny is going to count

I do realize from an underwriting standpoint the likely hood of rejecting a case do to insufficient residual income is pretty slim however, it is a real consideration from an underwriting standpoint and needs to be given some weight when making the final decision. In short, the unspoken rule. As always, happy underwriting.

About the Writer. As an NAMP staff writer, Bonnie serves as a senior instructor for FHA Online University as well maintains a full-time job as Senior DE Underwriter for a major banking institution. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)