Chris Mock & Rob Chrane: Improving Affordability Despite an Uncertain Mortgage Environment

Chris Mock is Vice President of Mortgage Verification Solutions with Equifax Workforce Solutions. He has worked in many areas of the mortgage ecosystem, including industry leaders Genworth Mortgage Insurance, Freddie Mac and USAA.

Rob Chrane is the founder and CEO of Down Payment Resource and a leader in the homeownership affordability space. A 30-year veteran of the real estate and mortgage industries, Chrane actively collaborates with housing organizations and coalitions such as the Urban Land Institute, National Fair Housing Alliance and the Mortgage Bankers Association’s CONVERGENCE initiative.

Today’s mortgage landscape presents numerous challenges for borrowers and lenders alike. High inflation coupled with elevated interest rates contribute to these difficulties. As of March 2024, the total U.S. consumer debt sits at $17.39 trillion, and mortgage debt, including home equity loans, comprises $12.65 trillion of this total.

Amidst this economic climate, 62% of consumers are living paycheck to paycheck and struggle to pay their bills in addition to other essential living expenses like housing, utilities, groceries, and transportation.

Despite the economic environment, however, consumers are still looking for homes and are prepared to buy as inventory increases. Loan affordability — informed by strategic leveraging of a borrower’s debt-to-income ratio — is key for enabling lenders to provide homeownership opportunities to as many consumers as possible.

While financial institutions face the challenge of increasing originations and balancing the risk associated with loan affordability, a data-driven approach can help lenders expand the pool of potential borrowers. To do this, lenders need to be diligent in their assessment of a borrower’s ability to repay loans and look beyond traditional measures when determining credit worthiness.

Enhancing loan affordability

For lenders to maintain a competitive edge, they must have a complete picture of a borrower’s ability to repay current and future loans. As a result, loan affordability has become a vital component for preserving homeownership and promoting financial wellness.

Accessing loan affordability hinges on the debt-to-income ratio, which measures a borrower’s total debt against their gross pre-tax income. Although the maximum DTI ratio for mortgage qualifications can be up to 50% depending on qualifying factors, many financial institutions opt for a more conservative range between 35% and 43%.

Leveraging consumer income and employment data can play a major role in better understanding loan repayment patterns and calculating an accurate DTI ratio. When collecting a borrower’s income and employment information, lenders may use a variety of sources including instant verifications, bank transaction data, consumer-permissioned data from third-party platforms, or physical documents such as pay stubs and W-2s. 

However, some methods can carry a variety of potential risks, in terms of security and storage of financial data from third-party aggregators. Lenders should carefully consider the sources of data used to help determine loan terms while managing risk.

Concerns regarding affordability have prompted some financial institutions to use additional income sources like bonuses and commissions to qualify for loans. This highlights the importance of verifying every source of a borrower’s income to avoid complications during the underwriting process.

Alternative resources help expand homeownership opportunities

By adopting a data-driven approach to assess DTI ratios, lenders may be able to responsibly expand homeownership opportunities for borrowers, including those outside of the traditional DTI range. For instance, many homebuyer assistance programs offer a potential path to homeownership. An analysis of Home Mortgage Disclosure Act data found that 42.4% of low to moderate income loan applications were denied for insufficient funds or disqualifying DTI ratios and that nearly one-third of loan applications denied on these grounds may have been approved with down payment assistance.

Frequently, the largest obstacle for homebuyers is the down payment. Down payment assistance programs can significantly enhance a borrower’s ability to qualify for a loan, provide funds needed to close  and reduce their DTI. This results in more buyers getting approved for purchase loans that they can repay. While this assistance combined with alternative data analysis could benefit borrowers across the credit spectrum, it may be especially impactful for potential borrowers with lower credit scores.

The mortgage lending environment is challenging, and affordability is a large concern and obstacle for many lenders and borrowers. However, with the use of additional data and available assistance programs, lenders may be able to confidently say “yes” to more borrowers. Lenders that leverage income and employment-driven loan affordability assessments in addition to a flexible understanding of DTI ratio may be able to responsibly support more consumers on their path to homeownership.

(Views expressed in this article do not necessarily reflect policies of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Editor Michael Tucker or Editorial Manager Anneliese Mahoney.)