- The way loans are valued and mortgages drawn penalize low-income borrowers.
- Lenders should have more freedom to include non-traditional loans such as rent and utilities in a borrower’s credit history.
- The industry needs to change the way it handles student loan debt, which is increasingly turning borrowers away from the residential ladder.
- Skylar Baker-Jordan is a freelance writer who has worked in the mortgage industry.
- This is a split opinion. The thoughts expressed are those of the author.
- You can find more articles on Insider’s business page.
America is in a real estate crisis. “US home sales are rising. When does the music stop?” asked Stephanos Chen of the New York Times last month. CNBC Reports that “when will the housing bubble collapse?” is a “glowing” google search. Meanwhile US News and World Report warns that “cities need a building boom to avoid a real estate bubble.”
While inflated house prices could be worrying, this is not the most pressing housing crisis America faces today. Much more alarming is the lack of affordable housing and financing options for low-income borrowers. The way we lend and qualify borrowers is classic by nature, and America’s obsession with affluent borrowers and its credit rating system is wrongly keeping low-income but responsible people off the home ladder. If we really want to help people in homes, we have to change the way we qualify borrowers for mortgages.
The lack of affordable housing is often cited as the most pressing obstacle to home ownership. This is indeed a problem. The coronavirus has forced many homeowners to sell, either out of fear of financial uncertainty or because they didn’t want strangers to roam their homes during a pandemic. For those of us familiar with the mortgage industry – which I’ve worked in a lot over the past decade – the lack of real estate available for sale is nothing new.
In cities like Chicago, where I’ve spent much of my mortgage career, Deconversions transform apartment buildings into single-family houses. Inadequate supply of newly built homes – a chronic problem since the big one
– has further led to it a lack of supply across the country, especially for homes that lower-income buyers can afford. According to the National Association of Realtors, Home sales in the $ 100,000-250,000 range were down 11% from February 2020 to February 2021 while home sales grew 81% over $ 1 million.
This means lower income homebuyers compete for less available homes, but the problem doesn’t end there. Virtually all of these borrowers require a mortgage. While Mortgage rates are historically low, Mortgage policies have historically been strict. This makes it difficult for responsible, low-income borrowers to obtain credit.
From an underwriting point of view, you want to look at “Three Cs:” ‘s ability for repayment, security, and creditworthiness. Of course, you want to know that a borrower is making enough money to make timely mortgage payments and that they have a sufficient down payment (so that they have a financial share of those timely payments) and that the home is worth what you loan out . However, this is how we determine creditworthiness, which is unfairly penalizing lower-income borrowers.
You must have credit in order to get credit. Depending on the lender and the investor – that is, who the loan is being sold to the secondary marketThis is where the service rights for loans and the mortgages themselves are sold (mostly Fannie Mae or Freddie Mac). To get a mortgage, you need a certain number of existing tradelines. Yes, even applies for credit can lower your score. Those with higher scores – usually (but not always) higher earners – are better able to absorb this blow. Additionally, low-income and younger borrowers are less likely to have credit cards and other traditional lines of trade actually reporting to credit bureaus, and a History of Racial Discrimination left black Americans in an unfair credit disadvantage.
However, these people pay bills and often on time. Most people pay rent, electricity, water, gas, telephone bills, and so on, despite poor traditional credit ratings. However, these invoices only show credit if they enter collections. This means that the bills that people on lower incomes are paying may not help them, but rather hurt them.
This puts lower income borrowers at a disadvantage and paints an incomplete picture of a borrower’s creditworthiness. After all, someone who is late with their credit card or jewelry payment can be very consistent in paying their rent and utility bills, prioritizing needs (like housing) over luxury. Credit reports will never show this.
This poses another problem with credit underwriting: we don’t take into account the bills people actually have to pay. Since the debt-to-income ratio (DTI) used in underwriting is obtained from the debt reports in a borrower’s credit report, monthly expenses such as utilities and
are not counted (again unless they become criminal). Adding these “nontraditional tradelines” to a credit report means they will count towards the borrower when calculating their DTI. While some might argue that taking out these loans would do a disservice to lower-income borrowers as it would increase the number of debts insurers have to settle against them (thereby reducing purchasing power), it is important that the borrowers to do Keep these bills in mind when making any decision to buy a home. Inclusion in the DTI quota would give everyone, including borrowers, a better idea of what they can and cannot reasonably afford.
Lenders are beginning to understand this problem. Quicken Loans is Encourage millennials to take credit cards out to improve their creditworthiness, while Veterans United – which specializes in lending to military veterans – touts the use of alternative trading lines to qualify VA borrowers. However, just using nontraditional loans to get a more accurate portrait of a borrower’s creditworthiness is not enough to address the housing shortage for lower-income Americans. We need to change the way we draw borrowers.
Deposit for a dream
In the past decade, a home industry has emerged devoted to analyzing why millennials don’t buy houses. While many point to a delayed marriage age and a more rootless existence for this generation, the numbers show otherwise. A Urban Institute survey 2019 found that 53% of millennials said they couldn’t afford a down payment, while 33% said they couldn’t qualify for a mortgage.
Much of this is due to student loan debt. 83% of non-homeowners say they did Student loan debt that is keeping them from buying a home. Lenders and investors need to find new ways to handle these debts, which are increasingly ubiquitous and hamper borrowers’ ability to obtain a mortgage. Many borrowers move student loans or have income-related repayment plans. Fannie Mae has Converting the actual payment to a borrower’s debt-to-income ratio, but FHA still takes “the amount greater than 1% of the outstanding balance or monthly payment identified on the borrower’s credit report, or the actual documented payment.”
Because of this, loan officers and subscribers are often forced to qualify borrowers with payments that are greater than the borrower’s actual payment. This lowers the purchase price and amount of credit a borrower can qualify for, and hinders their ability to bid on homes in a market that is becoming more expensive every year. And while the Federal Housing Administration (FHA) allows higher DTI rates than traditional lending, I’ve seen too many times that student loans got borrowers above that skill level. This disproportionately harms low-income borrowers who may not qualify for conventional loans. So rely on the FHA for access to credit.
This problem shows no sign of going away. Student loan debt is in crisis in the United States and Higher education an increasing necessity in a constantly changing job market. I’ve seen this change in the mortgage industry in real time. The entry-level position that I was hired for in 2011 then only required a high school diploma, but within two years my company required applicants to graduate to entry.
The mortgage industry has yet to adjust to this new reality. Underwriters should be able to treat student loans as they currently treat medical debt. Lenders recognize and regularly are able to recognize a fundamental injustice in the American healthcare system Discounting Medical Debt from a Borrower’s DTI Rate. You should look at student loans in the same way and understand them as a necessity that should not deter borrowers from buying a home.
As anyone who has ever rented out a new home knows, it takes a long time to build a house. The housing shortage will not end anytime soon. We need to look for other ways to help resolve America’s housing crisis, including more equitable and equitable access to home loans. By modernizing credit assessment and underwriting practices, the mortgage industry can do its part to help a new generation of hardworking Americans realize the dream of home ownership.