Credit Score Analysis By Underwriters During Mortgage Process

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Credit Score Analysis By Underwriters During Mortgage Process

This BLOG On Credit Score Analysis By Underwriters During Mortgage Process Was UPDATED On November 20th, 2018

Credit Score Analysis By Underwriters During Mortgage Process

Two factors that determine whether or not borrowers qualify for mortgages are the following:

  • Credit Scores and payment history in past 12 months
  • Income and meeting the minimum debt to income ratio requirements

Besides meeting the minimum score requirement, mortgage underwriters will look at the overall borrower’s credit report and payment history.

Some of the red flags underwriters look for on every mortgage application are the following:

  • Having periods of bad credit
  • FHA does not require borrowers to pay outstanding collections and/or charge off accounts to qualify for FHA Loans
  • However, mortgage underwriters want to see that borrowers has re-established themselves after bankruptcy, foreclosure, and periods of bad credit
  • Has borrower been timely in the past 12 months
  • Late payments after bankruptcy and/or foreclosure will red flag the file
  • Credit Inquiries

Credit Disputes During Mortgage Process Will Halt Underwriting

Credit Disputes During Mortgage Process Will Halt Underwriting

Credit Disputes:

Borrowers cannot have credit disputes on charge off accounts and non-medical collection accounts if the the total outstanding balances is greater than $1,000:

  • Medical and non-medical collection accounts with zero balances are exempt from credit disputes and do not have to retracted
  • Any non-exempt credit disputes will halt mortgage process until it has been retracted
  • Public records such as bankruptcies and foreclosures on consumer credit reports that has been deleted through credit repair will get flagged
  • Public records will get discovered lenders do a national public records search during the mortgage approval process

There are three credit reporting agencies:

There are three credit reporting agencies:

  1. Transunion
  2. Experian
  3. Equifax

When mortgage borrowers and co-borrowers apply for a home loan, one of the first tasks a loan officer does is pull a tri-merger credit report on borrowers and all co-borrowers.

  • Each borrower normally will have three credit scores, one from each credit bureau
  • Normally, each will be different
  • However, there are instances where two or all of them may be the same scores
  • The qualifying credit score used for credit qualification purposes is the middle credit score
  • Borrowers who have co-borrowers on the loan, then the middle score of the lower borrower is used for credit score analysis and qualifying credit score

Case Scenario Of Credit Score Analysis By Lenders:

Case Scenario Of Credit Score Analysis By Lenders:

As an example, we will take a case scenario where a borrower has the following credit scores:

  • TransUnion Credit score is 680
  • Equifax is 580
  • Experian is 610

On the above example, highest score is 680 with TransUnion:

  • But lenders will use the middle credit score which is the 610 Experian
  • The 610 score is the qualifying number to see whether borrowers meet the credit score requirements for the loan program

Second Case Scenario Of Credit Score Analysis:

Second Case Scenario Of Credit Score Analysis:

With FHA Loans, co-borrowers are allowed and borrowers can have more than one non-occupant co-borrower added to their loan.

  • If a borrower’s spouse has higher score than the borrower, then then the lower of the two borrower’s middle credit score is used
  • If the borrower’s is lower, then then middle score of the borrower is used and not the co-borrower

Information On Credit Report

Information On Credit Report

The following information is reported on a tri-merger mortgage credit report:

  • Name of borrower and/or co-borrower
  • Social Security number of borrower and/or co-borrower
  • Borrowers residential history
  • All creditors information which includes past accounts, closed accounts, and current accounts
  • Public Records which includes bankruptcies in the past 10 years, judgments, tax liens, foreclosures, short sales, and other public records
  • Credit Inquiries on creditors that has pulled and reviewed credit report
  • Contact information of all creditors

Credit Payment History And Patterns

Credit Payment History And Patterns

Most of the information on a consumer report is self explanatory. Few people know their credit score or understand how it is calculated.

  • Additionally, most people are unclear about how their behavior can affect their scores
  • The majority of people understand the basics
  • Like failing to make a payment will make score go down
  • There are a number of complexities that confuses the average consumer
  • Most folks do not know how the bureaus come up with their scores

How To Maintain High Credit Scores To Qualify For Mortgage

How To Maintain High Credit Scores To Qualify For Mortgage

Here are the basics to maintain a good score:

  • Paying  debts on time
  • Have at least three to five revolving accounts with at least a $500 limit on each
  • Maxed out credit card balances will hurt so always have balances below 10% of the limit 
  • Carrying  too much debt on any one card will lower credit scores
  • Closing older accounts that has a good payment history is not recommended
  • Hard Inquiries will hurt you.

FICO Credit Score

FICO Credit Score

Lenders use the FICO version of the scoring model:

The FICO is determined by an algorithm developed by the Fair Issue Corporation (hence its other name of FICO score). Since its inception, three corporations, called “credit bureaus” specialize in collecting and reporting on financial histories. Those three companies are Equifax, Experian and TransUnion. While, the exact formula used to calculate your credit score is a tightly guarded industry secret, these companies provide general guidelines about financial behavior that can affect your credit score.

Below Is The Credit Score Analysis Of A Consumer:

  • 35 percent of a consumer report is based on the history of on-time or late payments
  • 30 percent: Available credit on open revolving accounts
  • 15 percent: The age of tradelines (old = good)
  • 10 percent: How often apply for new credit
  • 10 percent of consumer’s scores is based on variable factors, such as the types of open tradelines

Lenders use credit report in order to judge reliability as mortgage applicant.

  • Credit Reports indicates a consumer’s ability to handle debt responsibly
  • Helps lenders decide if whether the applicant is a desirable mortgage candidate

Credit Score Requirements For Mortgage

Credit Score Requirements For Mortgage

Below are the minimum credit score requirements for the individual loan programs:

  • HUD requires a 580 credit scores for 3.5% down payment
    • Borrowers with under 580 and down to 500 FICO can qualify for FHA Loans but needs 10% down payment
  • VA does not have a minimum credit score requirement
  • USDA requires 580 FICO
  • Fannie Mae and Freddie Mac requires a minimum of 620 FICO 
  • Non-QM Loans requirements will vary but will allow down to 500 credit scores
  • The lower the scores the higher the loan to value
  • Borrowers can qualify for 90% LTV NON-QM Loans with 680 FICO
  • Jumbo Mortgages require 700 FICO for the best rates
  • But we have Jumbo Mortgage Programs down to 500 FICO but larger down payments are required
  • Gustan Cho Associates at Loan Cabin Inc. offers 5% down payment NON-QM Jumbo Mortgages

Borrowers can qualify for lower scores than 580 FICO on government loan programs. We specialize in originating and funding loans with no overlays. As long as borrowers can get an approve/eligible per Automated Underwriting System findings, we will just go off the automated findings.

Benefits Of Higher Scores

Benefits Of Higher Scores

A high credit score will benefit borrowers for the following:

  • More options on selection of loan programs.
  • Lower mortgage interest rates.

Consumers are entitled to a free copy of their credit report once a year.

Here are tips on what to look out for when reviewing their credit report:

  • Check to ensure the figures are accurate and act quickly correct any mistakes
  • This may include any clerical errors, identity theft issues or incorrect information
  • If borrowers have lower scores, they need to do a credit score analysis and see what needs to be done to maximize their credit scores

Gustan Cho Associates at Loan Cabin Inc. is one of the very few national mortgage lenders with no overlays. Contact us at 262-716-8151 or text us for faster response for more information. Or email us at gcho@loancabin.com.

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