Portland Example: First Time Homebuyer Income Required to Qualify for a FHA Oregon Bond Loan Could Be Reduced by Up to 22% Using FHA Compensating Factors.

There are a wide variety of measures that are used to determine homeownership affordability. Those measures can include down payment assumptions, loan rate assumptions, home price assumptions, and allowable debt to income ratio assumptions. 

However I don't recall seeing any projections of the income required to purchase a home that use compensating factors as part of the debt to income analysis. Compensating factors allow applicants to qualify for larger loans than they would qualify for using standard housing debt and total debt to income ratios of 31% for housing expenses and 43% for all reoccurring expenses.

I'm most familiar with FHA lending so my examples will focus on FHA compensating factors. but  I'm sure that other loan programs also have their versions of compensating factors. 

Pre COVID 2019 HMDA Data Shows That the MAJORITY of Oregon FHA Home Purchase Borrowers Had Debt to Income Ratios of 44% or Higher.

In Oregon my review of 2019 HMDA data shows that 52% of FHA home purchase first lien loans originated had debt to income ratios of 44% or higher. (4,404 FHA home purchase first lien loans where DTI was reported at 44% or higher/7,922 total FHA first lien home purchase loans where DTI was known=52%). 

I also looked at Oregon 2019 HMDA data for FHA first lien home purchase loan originations to Hispanic, Black, and Asian borrowers. Their share of FHA first lien home purchase loans originated where DTI was 44% or higher was 66%, 67%, and 67% respectively.

[The link HERE will download the 2019 HMDA Oregon data for your review and further analysis]. 

FHA Compensating Factor Guidance

FHA's Single Family Policy Handbook 4000.1 includes a matrix of manual underwriting compensating factors that can be used to increase the percentage of income that can be used to qualify for an FHA loan.

The table pasted below (from handbook printed page 335) lists those factors that can be used to increase the amount of income used to qualify an applicant for an FHA loan:

A Portland  First Time Homebuyer Metro Example. 

I took the information from that table and applied it to an example I created for the Portland metro area for first time homebuyers. The PDF table I created is HERE and embedded below.

For the Portland metro area I created four scenarios shown in the PDF; a description of the compensating factors required for each scenario at at the top of each column:  

1. All scenarios assume a credit rating of 580 or more. This is, by itself, a compensating factor.
2. All use the current OHCS non targeted area Portland metro maximum purchase price of $453,000, the 2.25% current "cash advantage" interest rate for the Oregon Bond program, and a 3.5%/$15,855 down payment. All scenarios are fixed rate 30 year loans. Note that these terms are generally available only to first time home buyers. There are some exceptions for veterans and also for purchasers of property in targeted areas.  
3. The one time 1.75%/$7,650 FHA upfront mortgage insurance premium is included in the amount financed and the monthly MIP expense is .85%/$310.
4. Monthly property taxes and insurance and homeowners association expenses are estimated at 1.3%  of the purchase price divided by 12. ($491 per month).
5. Total monthly housing expense is $2,387.
6. Monthly non-housing reoccurring debt is assumed at $300 per month except for the 4th scenario where it is zero.
7. None of the scenarios factor in any boost for energy efficient homes, which could add 2% to the front and back ratios. My read is that these factors may only be available for scenarios 1 and 2.

Observations:

1. Using standard FHA underwriting ratios of 31%/43% in the first scenario the applicant would need $96,800 in annual income.
2. Scenario 2 requires only one compensating factor out of three possibilities and would decrease required income to $81,200 and increase allowable underwriting ratios to 37%/47%.
3. In scenario 3 there is an $75,100 income requirement but the applicant must meet at least two of these three compensating factors. The $75,100 income requirement is 22%/$21,700 less than in the first standard scenario. The underwriting ratios for this scenario are further increased to 40%/50%.
4. In scenario 4 (with only ONE required factor--no monthly recurring debt) the annual income required is also $75,100. using underwriting ratios of 40%/40%.
5. Using HUD's 4 person MFI for the Portland metro area of $96,900, 

Scenario 1 requires an income of $96,800---100% of MFI, 
Scenario 2 requires an income of $81,200--84% of HUD MFI, and 
Scenarios 3 and 4 require an income of $75,100--78% of HUD MFI.

NOTE: Use of a higher down payment would reduce monthly housing costs and reduce the income required to qualify in all scenarios, but poses a challenge for first time home buyers since it would also increase the cash required to close the loan.

Caveats:

1. The guidance cited above applies to manual loan underwriting. I do not know the extent to which these specific factors are modified or incorporated in the automated underwriting systems.  However given the large share of loans with DTI of 44% and higher it seems highly like that FHA approved automated credit scoring systems DO use credit scores and other factors in issuing loan approval decisions for loans with DTI at 44% and above. 
2. Lenders are free to adopt more restrictive standards than found in the handbook.  
3. I used the more restrictive income income limit of the two limits in each scenario rounded up to the next higher $100. 
4. The documentation required for each compensating factor can be found starting on PDF page 351 of the 40001.1 handbook.  
5. I used the latest version of the handbook, which is effective in August; I don't see any substantive changes in the compensating factors from those used in the current Handbook.

Originally created and posted on the Oregon Housing Blog.

My Excel Lookup for Oregon County Income Limits for the Treasury Homeowner Assistance Fund.

Treasury has set income limits for the HAF program at 2X and 3X the HUD low income median incomes adjusted by household size. Most but NOT all of the HUD low income limits are set at 50% of median income. 

To drill down to the specifics for each Oregon county I have created an Excel worksheet HERE and embedded below to lookup the relevant 100% and 150% of HUD's low income limit for all Oregon counties. 

ALL that the user has to do is select the county name and all the relevant values for different household sizes are calculated. The default view is for Multnomah county (would apply to other Portland metro counties also). The 4 person 100% income limit is $96,700, and at 150% it is $145,050. 

Source of Income Limits Could Change

Note that my calculated $96,700 100% median income limit is slightly lower than the published $96,900 median income for the Portland metro area. 

My 4 person Portland metro calculated 100% median income limit of $96,700 is also substantially lower than the 3 or more person $117,119 to $135,380 income limit now permitted by the Oregon bond homeownership loan program. 

It is possible (likely?) that Treasury will publish further income limit guidance that will allow use of other income limit standards. But for now I believe this is the most accurate calculation available. 

Originally created and posted on the Oregon Housing Blog. 

Washington State Has Their Draft Pilot Homeowner Assistance Plan Out for Public Comment.

Washington state has their 11 page draft pilot plan to spend 10% ($17.315M) of their Homeowner Assistance Fund allocation out for public comment through June 7th. 

I have downloaded their draft HERE; their webpage for HAF is HERE. 

My observations:

1. Only 10% of total HAF allocation is included in plan. Draft indicates that Treasury requires a plan OR a date for submission for a plan by June 30th. This draft clearly is intended to be a plan that meets the Treasury deadline by being a plan with a date ("in the next few months") for submission of a (FULL) plan.  
2. No geographic targeting or set aside; appears to be  first come, first served. 
3. No data provided on location or concentration of seriously delinquent loans or presumptively socially disadvantaged homeowners. 
4. Income limits at 100%, NO assistance for 100% to 150% median income homeowners (the Treasury Plan limit available after 60% of funds are spent at or below 100%).
5. No actual income limits by county and household size are included. 
6. Max assistance per homeowner is $25,000 unless you’re in a socially disadvantaged group and then it could increase by 50% /$12,500. [Page 7-8].
7. Several existing programs will be funded by HAF. 
8. Admin and IT cost is about 10%.
9. Actual HAF amount available for direct benefit to home owners appears to be about 66% ($11.485M) of the total of $17.315 M. [Page 10 and table below].

Table here from page 10 shows planned fund expenditures: 

Originally created and posted on the Oregon Housing Blog. 

My Oregon Homeowner Assistance Fund Estimate: Presumptively Socially Disadvantaged Owner Occupants Were 13.4% of All Owner Occupants in 2019

Oregon is slated to receive $90M+ to help homeowners from the American Rescue Plan Home Owner Assistance Fund (HAF).

My read is that Treasury guidance on the HAF is that it requires that funds spent on households above 100% of the household adjusted income limit be prioritized for "socially disadvantaged" homeowners.

That Treasury guidance further provides that African-American, Asian, Native Hawaiians and other Pacific Islanders, American Indians and Alaska Natives, and Hispanics are all "presumptively" socially disadvantaged. 

In the absence of any current Treasury guidance on how to count presumptively socially disadvantaged homeowners  I thought it might be useful to look at existing data sources and provide some estimates for Oregon. 

The PDF file HERE and embedded below provides my counts of these presumptively socially disadvantaged homeowners along with their share of all homeowners and my rankings by both shares and counts of socially disadvantaged homeowners. 

Data is presented at the state wide level, at the three Portland Metro county level, and at the individual county level.

(TIP: You may need to scroll to the right to see all the columns in the PDF within your browser; downloading the file to your computer and opening in a PDF reader may allow better viewing of the full document).

My calculations: 

• Statewide 13.4% of owner occupants were presumptively socially disadvantaged owner occupants.
• In the combination of the three Portland Metro counties there was a higher percentage (17.2%) of presumptively socially disadvantaged owner occupants.
• In the rest of the state counties, there was a lower percentage (10.6%) of presumptively socially disadvantaged owner occupants.
• Morrow county had the highest percentage of socially disadvantaged owner occupants, while Baker had the lowest at 3.5%

Potential Uses:

IF counts of seriously delinquent loans are available at the state, county, or census tract levels are available multiplication by the presumptively socially disadvantaged homeowner rates will produce a count of those homeowners that may be helpful for outreach, servicer contacts, and fund allocations. 

[Note that I have previously produced counts of a subset of FHA seriously delinquent loans at the census tract level., using FHA published counts of those census tracts with 11 or more seriously delinquent loans].

These counts provide a baseline target for goal setting. 

• If funds are made available to owner occupants above 100% of median income it's reasonable to expect that the share of recipients in these groups reach these percentages.  
• And, for recipients below 100% of median income, these percentages should be the bare minimum since owner occupants in these presumptively socially disadvantaged groups are likely to have incomes below white owner occupants. 

Data Source and My Methodology: 

I used 2019 ACS 5 year table S2502. I used the five year ACS data because that data is available all the way to the census tract level. 

The link HERE should provide a download of 2019 5 Year ACS Table S2502 data for the state of Oregon, Oregon counties, and Oregon census tracts. Note that margins of error increase at smaller geographic levels.  

To arrive at the total count of socially disadvantaged owner occupants I added the estimates of all owner occupants who were 

1. Black, 
2. Asian, 
3. Native Hawaiian and Other Pacific Islanders
4. American Indian and Alaska Natives, 
5. Some other races
6. Two races
7. White Hispanics. [I derived that count by subtracting the count of White Not Hispanics from the White one race count] I included the resulting white Hispanic count because Hispanics are already included in the other race categories and including the full count of Hispanic owner occupants would result in double counting. 

Originally created and posted on the Oregon Housing Blog.