Factors Outside the Debt-to-Income Ratio
When originating a mortgage or auto loan, many factors go into a lender’s decision to determine if a borrower is qualified or not. As with any lending, there is other information to consider, including income, credit history and value of a loan. But what about other payments that borrowers are faced with on a monthly basis? Beyond just making sure all information is accurate when a borrower is applying for a loan, one senior financial policy specialist encourages financial institutions to look into other data when making decisions.
In an American Banker article, Philip Henderson explains what else should be considered when lending to borrowers beyond debt-to-income ratio. Often , other expenses can make up a high portion of a borrower’s income. Including how much a borrower spends on transportation – such as current car payments – or average monthly utilities can help lenders have a bigger picture of the borrower’s current status. This data can be used for refinancing as well, using past information to see how a borrower’s status has changed.
“Recent studies strongly suggest a homeowner’s utility expenses and transportation expenses can be meaningful determinants of delinquency, default and prepayment,” Henderson wrote. “A new study by University of North Carolina economists found 30 percent better loan performance for Energy Star houses, and another paper found better loan performance for houses in ‘location efficient’ neighborhoods.”
Henderson also explained that not only is collecting this data important, but how to actually make lending decisions related to car payments is important as well. For banks and other financial institutions, risk assessment tools and automated decisioning software can help. With credit tools, alternative data can be used to make strong decisions regarding borrowers, helping financial institutions remain profitable.