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MortgagePoint ยป Your Trusted Source for Mortgage Banking and Servicing News 48 February 2024 F E A T U R E S T O R Y HELOC, homeowners can access this equity without the hassle of selling their home or refinancing. As a result, they can conveniently access incremental funds as needed, only incurring interest on the amount drawn. But there's a twist to the increase in HELOCs: the data shows that more HELOCs are being issued to consumers with subprime credit scores (of less than 620.) Originations through June 2023 saw 4.3% of HELOCs were issued to home- owners with subprime credit scores, almost double from the year prior. And unlike conventional mortgages, lenders issuing the HELOC are on the line if a borrower defaults. While traditional credit reports have been the go-to tool for assessing borrowers' creditworthiness, the HELOC underwriting process neces- sitates a more comprehensive approach. Credit reports remain an important tool, but relying solely on them may not provide a complete picture of a borrow- er's financial situation. Crucial infor- mation such as income, employment stability, and debt-to-income ratios may be missing from traditional credit data. Incorporating income and employment data from third-party sources regulated under the Fair Credit Reporting Act (FCRA) can help provide lenders with a more comprehensive understanding of an individual's financial situation, encompassing various income sources such as employment wages, bonuses, commissions, dividends, and more. It can also offer a detailed view of gross income and salary or wages, contributing to a more holistic assessment of a borrower's financial capacity. Employment data can also play a sig- nificant role in the assessment process. It allows for a truly holistic perspective on an applicant's work situation, includ- ing details like the employer's name, job title, duration of employment, and employment status (e.g., active, inactive, furloughed, full-time, part-time, or contract). Access to historical employ- ment data spanning months or years helps gauge the applicant's employment consistency and income stability, which are vital factors in evaluating credit- worthiness. These data points, while often overlooked in traditional credit assessments, can play a pivotal role in HELOC underwriting. Lenders can use this information to evaluate a borrower's ability to repay loans, determine their creditworthiness, and assess their overall financial stability. The Debt-to-Income Ratio: A Key Metric in Underwriting L enders have to properly assess whether the borrower has the financial capacity to add the additional debt to their existing debt load. The debt-to-income (DTI) ratio evaluates a borrower's ability to repay that debt by comparing monthly debt obligations, including potential HELOC payments, to monthly income. Ideally, lenders seek a DTI ratio below a specific threshold, often aiming for 36% according to Fannie Mae, or 43% according to the Consumer Financial Protection Bureau, to ensure borrowers can comfortably meet their debt obligations. However, depending solely on borrower-provided information for DTI calculations can pose significant risks for lenders. Inaccuracies or omissions in the borrower's financial data aren't uncom- mon and can lead to incomplete assess- ments of their creditworthiness. This is where verification of financial data from independent third-party sources can help mitigate the risks and enable more informed underwriting decisions. By verifying employment status, job title, income, and other relevant details through third-party sources lenders can ensure that the borrower information they have is current. This information can ultimately help reduce the risk of defaults and provide a more complete picture of the borrower's financial capacity. Additionally, leveraging income and employment data helps create for lend- ers a standardized approach to evaluat- ing borrowers. For instance, right now, income is the biggest risk when it comes to mortgages in the current economic state, potentially transferring that risk to HELOCs if full affordability diligence is not completed and creating a larger need for leveraging that data. This promotes consistency in the underwriting process and helps ensure that people with similar income levels and employment statuses are treated consistently. The Future of HELOCs and Data T he ebbs and flows in HELOCs showcases the tumultuous economic landscape of today, characterized by in- flation, soaring home prices, and fluctu- ating mortgage rates. HELOCs continue to offer a lifeline for homeowners and their evolving financial needs. However, the HELOC underwriting process may require a more compre- hensive approach than traditional credit assessments can provide. Income and employment data offer valuable insights into a borrower's financial capacity and stability. By leveraging this data, lenders can better reduce risks, enhance consis- tency in their process, and make more informed underwriting decisions. As the housing market continues to evolve, lenders must adapt. Incorporat- ing income and employment data into the HELOC underwriting process is a significant step toward ensuring a more stable financial future for both lenders and borrowers. As HELOCs continue to be a financial resource for homeowners, lenders need to collect holistic data in order to make more informed, responsi- ble decisions.