BLOG VIEW: What are the primary factors that affect a borrower's ability to repay?
If you mentioned maintenance costs on the house they purchased, you'd be 100% correct – however, lenders seem to have a difficult time accounting for future maintenance costs when underwriting loans and determining debt-to-income (DTI) ratios.
Part of the problem, of course, is that the amount of maintenance and upkeep a home requires depends on several factors, including its age and condition, as well as what style of home it is, what design elements it includes and what building materials were used. As a result, there can be tremendous variability in how much a homeowner will need to spend on maintenance over the course of the loan lifecycle.
As such, lenders must do a better job of factoring property maintenance into their DTI calculations.
A new report called the Maintenance Affordability Report (MAR) will help lenders better comply with the ability-to-repay requirements established under Dodd-Frank. In a nutshell, the report provides monthly maintenance costs based on the Uniform Appraisal Data (UAD) condition code provided in an appraisal report and based on a physical inspection of the property. All a user has to do is enter the address and code and the report provides monthly maintenance cost estimate for the subject property.
The report was created based on the conclusion that determining accurate maintenance costs can help lenders better determine if their DTI ratios are accurate.
Maintenance costs have a direct impact on a lender's collateral and the health of a neighborhood. Just because a home is in average condition at closing does not mean the borrower can afford the maintenance on it in the future. Older homes, especially, can have costs that pile up quick. Many new homeowners have good intentions and want to upgrade their homes almost immediately, but very often they cannot afford it.
Sometimes, borrowers buy homes that are in average condition upon origination and develop a sense of complacency that the home won't need repairs for years. However, if a major repair comes up sooner than expected, it can blindside the homeowner. This, in turn, can cause the homeowner to miss mortgage payments – especially when the repair is for something critical, such as a new roof or furnace.
Lenders can protect their position with a more detailed consideration and/or inclusion of maintenance costs in the DTI calculation. For example, it can be verified that certain systems in the home have a certain number of years left before they will need repair or replacement. The borrower, in turn, can be informed of the need for these future repairs or replacements at the closing or even earlier in the application and approval process. This can reduce stress on the borrower and improve long-term outcomes.
While the Dodd-Frank Act does not specifically state that maintenance fees be considered, it does have language that indicates that it would be a good idea. Language such as "loose underwriting practices by some creditors," could even be constructed to mean that more can be done in accurately determining a borrower's DTI. As such, key elements such as monthly payment for mortgage-related obligations and monthly DTI ratio or residual income are being more emphasized than ever in the underwriting process.
Lenders are now required to show that, at the time the loan was originated, the consumer's debt obligations left sufficient income to meet living expenses – including maintenance on the home. This includes the consumer's monthly payments on the loan, loan-related obligations, and any concurrent loans of which the creditor was aware, as well as any recurring, material living expenses of which the creditor was aware. Bottom line: A lender is prohibited from making a ‘covered loan’ unless it makes a reasonable and good faith determination that the borrower will have a reasonable ability to repay.
The impact of loose underwriting with regard to maintenance affordability is more evident in lower-income communities. That's because many of the homes located in these communities are higher risk in terms of the amount of maintenance and upkeep that they require. They are also higher risk in that it is more likely that a homeowner will not have the income needed in order to make major repairs.
As a result, it's possible that lenders may be found liable for deterioration of neighborhoods – in other words, ignoring the MAI could be considered a fair lending violation. It is already well established that high-maintenance properties are more likely to lead to neighborhood blight, deterioration and abandonment. What's more, difficulty in maintaining one's home can result in lead paint exposure, mold problems and poor air quality, among other health concerns.
The MAR report is designed to help lenders consider maintenance in loan underwriting, identify risk in these matters as well as inform borrowers of an important aspect of home ownership maintenance. It covers 80% of homes in the U.S.
There is no greater responsibility for lenders than to support policies and procedures that promote safe, healthy, well-maintained neighborhoods and communities for their borrowers.
For more about the report, click here.
Steve Wiese is a real estate appraiser based in Farmington, Mich. He developed Appraisal Map, a thematic mapping tool for residential real estate values, and Enviro Check, a tool that reports on potential environmental dangers near residential properties.