Affordability Driven By Income
Income data is the baseline of information used to calculate the DTI ratio on a loan. Financial institutions employ a myriad of strategies to better understand an applicant’s financial capacity to repay, encompassing sources ranging from traditional to alternative such as bank transaction data or consumer-permissioned data provided through third-party platforms or aggregators or consumer-provided documents (e.g., pay stubs, W-2s).
These approaches, while diverse, potentially expose lenders and consumers to heightened risk. When linked via bank transaction data, many third-party aggregators continue to use consumer data until the consumer manually disconnects the third party from the account. The security burden of financial data storage could be a risk for lenders. Instead, lenders should consider using automated income and employment verification data from trusted sources to fuel loan term determinations while better-mitigating risk.
In the past, a lender may have qualified a borrower on base pay alone, but affordability has become such an issue that some people are tapping their extra income, such as bonuses and commissions, to qualify for loans. It is, therefore, even more important to verify all sources of the borrower’s income to help make sure there are no surprises during the underwriting process.
Trusted Data Leads To Better Opportunities
Helping pave the path for borrowers to make informed financial decisions requires lenders to thoroughly understand the borrowers’ gross spendable income and how much of it can be utilized in the mortgage payment. As lenders pivot to a data-driven approach in gauging borrowers’ DTI ratios, they may also unearth more favorable credit and loan outcomes for these borrowers.
Homebuyer assistance programs have emerged as a promising path to homeownership for a significant segment of aspiring homeowners. Research from Down Payment Resource details that 33% of all declined mortgage applications were eligible for homebuyer assistance, yet rejected due to insufficient cash-to-close or disqualifying DTI ratios.
This sizable share of potential customers spotlights a lucrative opportunity for lenders to increase volumes while supporting more borrowers in their journey to homeownership, and access to readily available income data facilitates the identification of these prospects.
A timely example that is growing in relevance is the rise of Gen Z as the next generation of homebuyers. Their financial behaviors set them apart, demanding lenders’ understanding of their unique attributes and how affordability challenges intersect with their aspirations.
According to Rocket Homes, Gen Z aspires to homeownership, with 86.2% of 18-24 year-olds aiming for this milestone, and 45% seeking to own a home within the next five years. Despite their enthusiasm, challenges loom for Gen Z. The cohort’s concerns include inadequate down payment funds (21.9%), house price affordability (18.4%), credit sufficiency (16.1%), and student loan debt load (10.5%). The use of automated income and employment verifications may help lenders better understand a Gen Z applicant’s ability to pay.
In the ever-evolving economic environment of 2023, lenders are finding themselves in need of robust tools to expand their lending opportunities responsibly. Income-driven loan affordability determinations are foundational to better serving borrowers; this approach, underpinned by a nuanced understanding of the moving target that is DTI ratio, empowers lenders to navigate challenges and propel borrowers toward brighter financial futures.
