Written By: Bonnie Wilt-Hild
With all of the recent changes to investor guidelines concerning minimum credit score requirements and the ever so popular dependency on Automated Underwriting Tools, I have been thinking a lot about what other tools are available to underwriters and support staff alike that might just bring the otherwise deserving borrowers into realm of homeownership.
I have done some research lately and have all but concluded to some degree that borrowers with credit scores less then 580 do not present significant credit risks to lenders but actually to some degree present less of a credit risk and overall increased profitability.
One survey that I indulged in (I do believe I need an intervention as I seem to be an information junkie) actually determined that less credit worthy borrowers quite often prepay their loans less often due to the lack of refinance options therefore providing increased overall earnings for lenders due to increased life of servicing.
These borrowers, it would seem, have a greater tendency to repay their mortgages, as the option of refinancing to either skip mortgage payments or just simply increase wealth by removing the equity from their homes is limited based on their overall credit characteristics. In addition, they are less likely to strip their equity, thereby are less likely to find themselves in a negative equity position thereby retaining the ability to sell the property in lieu of allowing the property to go into foreclosure.
So with this in mind, I began to think of other tools to help these borrowers become better-qualified candidates for mortgage loans. Needless to say, these types of borrowers are perfect fits for the FHA program, which is significantly more forgiving where underwriting criteria is concerned.
As the program itself was designed to benefit the low to moderate-income borrower as well as other underserved segments of the population it makes sense that guidelines have been developed to take things like reduced income and overall wealth into consideration when underwriting these borrowers.
As for these guidelines it occurred to me that in many instances the potential borrowers overall credit history is often not the result of financial mismanagement but the result of lack of education where managing finances are concerned. Many borrowers which fall into low to moderate income categories do not have the financial background or over all wealth to make sound investment decisions where their financial future is concerned.
In short, many of them live paycheck to paycheck and in the event of any type of extenuating circumstance the borrower may be unable to meet their financial obligations in a timely manner. This does not however mean the individual is unwilling to pay their debts timely, it just means that they, for whatever unforeseen reason, can not.
In these situations I think that education can go a long way in helping potential homebuyers understand the financial commitment they are making when purchasing a home. Think about how many times as underwriters we have received a credit explanation in which the borrower has stated that because they did not use a credit card but instead cut it up and closed the account that they did not feel as though they owed the credit card company the fee charged for activation. This is a clear example of a lack of education where financial matters are concerned. This is not limited to just low and moderate income borrowers but also young borrowers without the real life experience where handling financial matters are concerned. This is where I think Homeownership Counseling can play a pivotal role on how well a borrower will perform under a newly acquired mortgage.
HUD has many homeownership counseling agencies listed on their website to assist potential homebuyers. In addition, homeownership counseling courses can be taken on line by the homebuyer to better prepare them as to how to manage the financial obligations in the wake of the home purchase. I have conditioned borrowers who fit into this category on several occasions to complete homeownership counseling courses and provide a monthly budget as to how they will manage the increased housing expense on several occasions. For the most part it has always worked out.
So when you are underwriting the next case and feel like you are on the fence where approval is concerned due to some credit issues consider if homeownership counseling might be an appropriate course for your borrower. I am not saying that it is the perfect solution for every borrower but it may help a few achieve the goal of owning their own home.
About The Author
Bonnie Wilt-Hild - As an NAMP® staff writer, Bonnie currently serves as a senior instructor for FHA Online University (www.FHA-Classes.org) 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: contact@mortgageprocessor.org.
