Why Using Base Income is Best

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

I have recently had a new revelation and though this would be a nice time to share, you know with this being the holiday season and all. Very recently I have done some research on the predominant reason for mortgage default and as we can well guess, it seems that curtailment in income seems to be the reason in the majority of cases. There are still those cases that claim excessive obligations as well but if you really think about it, that too will play into the curtailment in income as an individual is more likely to incur debt as a means to finance one’s budget should their income be curtailed.

As I have reviewed some of the cases that have gone into default with the primary reason being a curtailment in income, it appears that a lot of those borrowers were qualified using substantial overtime, bonus or commission income which in my opinion leaves them far more vulnerable to unforeseen economic downturns. Further it seems that most individuals who earn significant bonus or commission income work predominantly in the sales or consumer services industries which always suffer should there be a slowing of the economy.

Generally, if people have less money they cut the things from their budget that are not necessities like dinning out, purchasing more life insurance, vacations and the like. This also has a huge impact on manufacturing. Think about it, if people stop buying new vehicles then the individuals employed in automotive manufacturing may have overtime cut or perhaps be laid off. The individuals involved in producing clothing won’t work as much overtime if people are purchasing less.

When we qualify most borrowers we never really think about what might occur where the economy is concerned down the road. We usually just determine if the borrower has a two year history of these types of earnings and verify employer conformation of continuance and move on. I have not begun to think that this might not be the most prudent approach to underwriting a borrower with significant earnings above and beyond their base salary. I think there should be some cut off where considering this income is concerned so as to anticipate future down turns where the economy or just perhaps the borrowers inability to work as many hours do to some unforeseen circumstance.

This is not to say however, that some borrowers depending on their line of work could not depend on regular overtime such as medical professionals and the like but I still think from an underwriting standpoint we need to draw the line somewhere, say at 25% of their gross monthly income and consider anything above that a compensating factor. I think in doing this we will see far less defaults due to curtailment in income while granting mortgages that will ultimately perform for the long hull without being so vulnerable to fluctuations in the economy and other unforeseen circumstances.

So this was my revelation for the week. I think it is certainly something we should all give a little more thought to from and underwriting standpoint. With that I will wish everyone, 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)