the past are no longer possible for banks that want to compete,” says ZIA Consulting. What file size reflects is a serious effort to verify borrower claims. This added bulk, while necessary, is cer- tainly an application problem. But big- ger issues lurk beneath the surface. All lenders generally treat income the same way. They check how much you earn each month before taxes. They can then see if it’s possible to “gross up” income for qualification purposes. While the expression “gross up” may not sound especially alluring, it can be a huge benefit to mort- gage applicants. It means that such things as child support, tax-exempt interest, and business depreciation can be added to taxable earnings to create a larger qualifying income. For example, if you report $90,000 in yearly income before taxes and receive $1,000 in child support, the lender will review your mortgage application as if you earned $102,000 a year ($1,000 x 12 = $12,000 plus $90,000). Grossing up can make a big difference for mortgage borrowers. The reason involves the debt-to-in- come ratio (DTI), a measure used to see if applicants qualify for financ- ing. Lenders don’t want to provide mortgage financing to borrowers with big debts and excessive month- ly payments. For example, lender Smith might be okay with borrowers who devote no more than 43 percent of their gross monthly income for recurring monthly debts such as housing costs, auto payments, stu- dent loans, and credit card bills. Using the 43 percent standard, if you earn $90,000 a year, you there- fore have an average household income of $7,500 a month before taxes. Allowable debt payments amount to $3,225 ($7,500 x 43%). However, if you earn $102,000, the WHAT IS GROSS INCOME, REALLY?

picture changes. Now you have a gross monthly income of $8,500 and 43 percent of that is $3,655. A bigger income allows you to have larger monthly debt payments and still satisfy lenders. This has become an increasingly important issue as consumer debt levels have soared. The Federal Reserve Bank of New York reports that total household debt reached $13.54 trillion in the fourth quarter. “The total,” said the New York Fed, “is now $869 billion higher than the previous peak of $12.68 trillion in the third quarter of 2008 and 21.4 per- cent above the post-financial-crisis trough reached in the second quarter of 2013.” One result of growing debt loads is that the HUD recently announced new and tougher FHA standards. Here’s why: • Almost 25 percent of all FHA-in- sured forward mortgage pur- chase transactions in fiscal year (FY) 2018 involved mortgages where the borrower had a DTI ra- tio above 50 percent, the highest percentage since 2000. • The average FHA borrower had a 670 credit score for FY 2018, the lowest average since 2008. • There have been a growing number of applications with credit scores of less than 640 combined with DTI ratios greater than 50 percent. • In FY 2018, 60 percent of all refi- nances were cash-out financing, meaning less equity is available to offset losses in a foreclosure situation. To reduce risk, the Federal Hous- ing Administration (FHA) is going back to a rule abandoned in 2013. For borrowers with credit scores below 620 and DTIs above 43 percent, the government will now require

manual underwriting. The likely result will be fewer FHA originations and that will translate into reduced home sales. In the wider market, we may also see an increasing use of dual-ap- proach mortgage underwriting, the use of both automated systems as well as manual underwriting. “One of the primary beneficiaries of non-agency, aka ‘non-QM’ lend- ing, is borrowers whose income is not ‘typical or customary,’” Ray Brousseau, President at Carrington Mortgage Services, told the “Housing News Report.” “These borrowers of- ten have good credit and assets, but their income is considered non-tra- ditional. They’re often self-employed,

16 | think realty housing news report :: june / july 2019

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