I am working with an applicant who is very low-income, purchasing a very (documented) energy efficient home and needs both the energy ratio increase and 38-year term to ratio qualify for enough loan funds. They’ve had the same job for three years, have great credit, no payment shock or any other areas of concern/risk. It has been suggested that it’s never okay to use the 38-year term in combination with the energy ratio increase. I see that the 38-year term can’t be used with other risk layers and the ratio bump is a compensating factor. I apparently hadn’t put this together in my head as a definitive “no” and wanted to reach out for your expertise and input.

Sincerely, Looking to Save Money and Energy

Dear Looking to Save Money and Energy,

Let’s look at the handbook first to identify the relevant sections we’re talking about and then break it down.

HB 1-3550, 4.24 A “Using Compensating factors” indicates:

Exceptions to the standard method of determining repayment ability may be made if there is information — called compensating factors — that indicates the prospective borrower may be able to make larger regular loan payments than the ratio analysis suggests. Compensating factors must be clearly documented in the applicant’s case file.

All compensating factors must be approved by the next level supervisor. To obtain approval, the Loan Originator must prepare a written request that supports the use of compensating factors and the higher amount requested. The Loan Originator should forward the request and case file to the next level supervisor for approval.

And in the handbook, specific to the energy efficient waiver:

When a new home to be constructed under a specific energy efficiency program will be used as a compensating factor, the qualifying ratios may exceed the established thresholds by up to two percentage points provided the Field Office obtains reasonable documentation that the property will be built to certification standards through one of the above programs.

HB-1-3550 Paragraph 6.16 Calculating The Approvable Loan Amount

  1. Working with Applicants Who Do Not Qualify Using Standard Terms

If the applicant cannot be approved for a loan using standard terms, the Loan Originator should determine whether any of the adjustments described below are possible. If any of the adjustments make the loan feasible, the Loan Originator should prepare the loan approval package, as described in Paragraph 6.17.

  1. Possible Agency Actions to Make A Loan Feasible

The Loan Originator should first consider any compensating factors, as described in Paragraph 4.24 A., that have not yet been considered and does not result in multiple risk layering. The Loan Originator should then recompute the loan using a 38-year term provided the applicant’s income qualifies for a 38-year loan.

So, you’ll want to carefully look at all of the file details (credit, income stability, etc.) to determine the risk levels before making a final recommendation. However, it appears the energy efficient waiver is low risk, and the 38-year term mitigates a lot of that risk, so I don’t see why you couldn’t do both. While the 38-year term is considered an exception to the standard, it does not require next level approval. Other compensating factors (like energy efficient waivers) do need next level supervisor approval. The handbook literally says, consider the compensating factors first and then if they still need the 38 years, do that as well. I don’t know what the ratios are for the applicant, but let’s say that the energy efficient waiver put them at 31/43 using the 33-year term, and then the 38-year amortization dropped that to 30/42.  To me, that’s a win for everyone.

Sincerely, Dear Sher

Dear Sher is a regular Self Help Builder News feature. If you have a question you would like answered or researched by Sher, please send it to asisco@rcac.org and your question may be featured in a future publication.