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Originating Investor Loans: Property DTI vs. Borrower DTI

computer-and-moneyInvestor mortgage loans underwritten based on a property’s income may pose unique risks but also possess strengths when compared with similar loans underwritten based on borrower income, according to a report from Moody’s Investor Service released Monday.

A lender’s ability to assess borrower creditworthiness is limited when an investor property loan is underwritten based on mortgage payments relative to property level rental income (the property debt-to-income ratio, or property DTI) instead of borrower debt-to-income (borrower DTI).

“Although focusing on income from an individual single-family rental (SFR) property relative to its mortgage payments could potentially prove a better gauge of default probability than focusing on a borrower's financials, such underwriting introduces new risks, for which there is limited historical information to assess,” the Moody’s report stated. “The extent to which lenders effectively address the risks will drive the overall credit quality and performance of such loans.”

To address the new risks introduced when using property DTI, lenders are contemplating several options to address the lack of borrower information, according to Moody’s. Those options include incorporating into their underwriting guidelines:

  • Additional equity, higher credit scores, or reserve requirements;
  • Well-defined in-place lease/tenant eligibility criteria; and/or
  • Reviews of property owners/third-party managers for proficiency in overseeing rentals.

When it comes to strengths, underwriting investor loans based on property DTIs possibly allows lenders to better assess a borrower’s tendency to default relative to property cash flows; a low property DTI indicates a low incentive for the borrower to default, according to Moody’s.

A form of property DTI known as debt service coverage ratios (DSCRs) is already being used by lenders in order to assess risk of default on loans backed by pools of single-family rental properties.

“Although these loans could provide insight into the potential effectiveness of property DTI underwriting on single-property loans, and thus the performance of future securitizations of such loans, the performance of loans backed by SFR pools is still relatively untested,” the report stated.

Click here to view the complete Moody’s report.

8-8 Moody's graph

About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.
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