The Realities of the Stretch Ratio Provisions on EEMs
I often hear the Stretch Ratio Provision of an Energy Efficient Mortgage (EEM) promoted as one of the great benefits it has to offer. I am a huge advocate of the EEM Program and have spent many years promoting it. I do not however feel that it benefits the program when there is so much misinformation circulating about it. Even though this particular misrepresentation promotes a benefit beyond what it actually does have to offer, I think this is damaging. It does not help anything if unreasonable expectations are set and transactions do not close based on erroneous premises.
The Stretch Ratio issue is like so many other components of the faulty information that is promoted. It is technically correct, but only out of context. The reality is that the “Stretch Ratio Provision” will almost always result in lower allowable ratios and qualifying levels being achieved. This is clearly counterintuitive on the surface so I am going to attempt to explain it.
There are two different processes that are used in underwriting FHA loans. One is Automated and the other is Manual. Almost every single loan is underwritten through the Automated Platform. This means that the borrower’s information is entered into a system that approves it based on what was entered before it is reviewed by a real world Underwriter. This does not guarantee that a real Underwriter will approve it, but it certainly helps. These loans are allowed to have higher qualifying ratios than Manually Underwritten loans. As an automated system it is not capable of factoring in every possible scenario for every borrower. For this, and a few other reasons, some loans have to be Manually Underwritten if they do not meet the criteria for the Automatedplatform.
FHA imposes some specific restrictions on the qualifying ratios when a loan is Manually Underwritten. They state that the qualifying ratios may be no higher than 31% of the buyer’s gross monthly income for their house payment and 43% for all of their monthly payments including their house payment. Automated findings tend to approve ratios much higher than this.
When “Stretch Ratios” are used under the EEM guidelines it necessitates a Manual Underwrite, the requirement to Manually Underwrite the loan reduces the allowable qualifying ratios by much more than was gained by the “Stretch Ratios”. The net result is actually lower allowable ratios and purchase price if you attempt to apply the “Stretch Ratio” provisions.
The only exception where there can be an incremental gain is situations where the Manual Underwrite was being required already for some other reason. In those instances an EEM can create huge benefits as it can help to off-set the issues that the Manual Underwrite created due to the more restrictive ratios. The “Stretch Ratio” ratio provision allows the maximum ratios on a Manually Underwritten loan to be increased to 33% for the housing expense and 45% for all payments including the house payment.
Sacramento 1st DBA Comstock Mortgage – Lic : 01390474
Kevin Nunn – NMLS 305826 / DRE 01158674
