Key facts
- Guild Mortgage is urging Fannie Mae and Freddie Mac to adopt residual income analysis.
- The lender argues this would reduce over-reliance on credit scores.
- Guild Mortgage uses residual income analysis for government loans.
- The company has found this method correlates strongly with loan performance.
- Residual income analysis assesses borrower disposable income after essential expenses.
Guild Mortgage is urging government-sponsored enterprises Fannie Mae and Freddie Mac to implement residual income analysis on a broad scale. The mortgage lender contends that adopting this underwriting method would significantly reduce the current over-reliance on credit scores, which it views as an insufficient indicator of a borrower's true ability to repay a loan. Guild Mortgage currently employs residual income analysis for government-backed loans and has found that this approach strongly correlates with superior loan performance. The company believes that wider adoption of this methodology could lead to more stable and reliable mortgage markets by providing a more comprehensive assessment of borrower risk. This push comes as the housing market continues to navigate economic uncertainties, with lenders seeking more robust tools to evaluate borrower creditworthiness and mitigate potential defaults. The residual income analysis method focuses on a borrower's disposable income after essential living expenses are accounted for, offering a different perspective on their financial capacity compared to traditional credit scoring models.