Tips For Loan Officers On How To Pre-Qualify Borrowers Credit
This Article On How To Pre-Qualify Borrowers Credit Was Written By Gustan Cho As A Training Guide For New Loan Officers
If you are a newly licensed loan officer readying this blog on How To Pre-Qualify Borrowers Credit, congratulations on passing the NMLS SAFE ACT EXAM and going through the state licensing process. Now since you have your NMLS license approved and active, the real fun begins. Many mortgage loan originators who have aced their NMLS exams are often surprised how much of the information on the exam has no purpose in actual practice for loan officers. Training a new loan officer takes a lot of time. Covering the basics such as qualifying income, learning how to pre-qualify borrowers credit, interpreting tax returns especially for self employed borrowers, and knowing the basic mortgage guidelines is not sufficient in being able to be an independent mortgage loan originator being able to take a file from pre-qualification to closing. Two of the most important tasks new loan officers need to master is learning how to pre-qualify borrowers credit, and how to qualify borrowers income. Loan Officers who are new to the business or need more training may want to read all of my blogs on Loan Officer Training which is under CATEGORIES labeled CAREERS/LOAN OFFICER TRAINING. We will cover How To Pre-Qualify Borrowers Credit on this blog.
Pre-Qualification And Pre-Approval Process
Many dread the term mortgage denial . If you are new to the business, do not be alarmed about getting any loans that you submit denied by an underwriter. You will know whether or not you will be able to close a mortgage loan. Do last minute loan denials happen? All the time but there is ways of not letting that happen to you. As mentioned, the number one reason for last minute loan denials is because the loan officer did not properly pre-qualify and pre-approve a mortgage borrower. There are many tasks on the pre-approval process and I will limit each of my Loan Officer Training Blogs to one specific topic. After your initial interview or during your interview with your borrower, you will be pulling a tri-merger credit report. The tri-merger mortgage credit report will give you three credit scores from each of the three credit bureaus: Transunion, Experian, Equifax.
Credit Scores Used For Qualifying
Each borrower should have three credit scores from each of the three credit reporting agencies: Transunion, Experian, Equifax. Just because a borrower meets the minimum credit scores does not mean that the borrower is credit ready for a mortgage pre-approval. Loan officers need to look at the overall credit report and pay attention to every line item on the borrower’s credit report and make sure that there are no red flags on a borrowers credit report. Any questionable item on a borrower’s credit report needs to be addressed. The way on how to pre-qualify borrowers credit is to look beyond the borrowers credit scores and look at the overall credit history but pay especially close attention to the past 12 months borrower’s payment history.
Public Records & Credit Repair
Even though the borrower’s credit report does not show any public records such as judgments, tax liens, bankruptcies, short sales, and foreclosures, always ask the borrower if they had any judgments or other public records. Reason for this is that there are folks who go through credit repair and have public records such as judgments, tax liens, bankruptcies, and foreclosures deleted off their credit report and think that they are good to go. Credit repair does work and maybe it works too well when it comes to negative deletions. There is no way of creditors and lenders can track down a deletion of late payments, charge offs, outstanding collection accounts, or credit trade lines such as auto creditors or other installment loan creditors, but public records such as judgments, tax liens, bankruptcies, and foreclosures will be discovered by all mortgage lenders. All mortgage lenders will do a third party public records national search through Data Verify or Lexis Nexis. A borrower who applies for a mortgage loan that has public records deleted off their credit reports will get an approve/eligible per Automated Underwriting System approval because the automated underwriting system will not pick up the public records. However, the mortgage underwriter will do a public records search during the mortgage underwriting process and the public records search will be discovered.
Loan officers should ask all borrowers if they had a prior bankruptcy, foreclosure, short sale, deed in lieu of foreclosure, tax lien, student loan delinquencies, child support delinquencies, or judgments during the pre-qualification and pre-approval process. If a borrower tells you that their credit scores have improved due to credit repair, this should be a red flag and make sure to tell them that public records will be discovered during the mortgage process and ask them if they had any deletions off their credit reports.
Credit Scores Versus Credit History
Many loan officers still make the mistake of just checking the borrowers credit scores and not thoroughly reviewing the borrowers credit history. Just because borrowers meet the minimum credit score requirements to qualify for a mortgage loan program does not mean that they are credit qualified. Late payments on a mortgage payment in the past 12 months will most likely be a denial and you will most likely not get an approve/eligible per automated findings. Most mortgage lenders will not allow any late payments in the past 12 months so make sure you check with your lender to see what overlays they have with regards to late payments in the past year.
Collection Accounts And Credit Disputes
Loan Officers need to thoroughly review borrowers credit reports and carefully review each collection accounts, charge off accounts, and make sure to review credit disputes. FHA does not require borrowers to pay outstanding collection accounts or charge off accounts. However, you cannot have credit disputes on any non-medical collection accounts if your total outstanding unpaid balance is greater than $1,000. Credit disputes on charge off accounts is not allowed either. You need to retract the credit disputes on all non-medical collection accounts and charge off accounts. You can have credit disputes on medical collection accounts and non-medical collection accounts if the non-medical collection account has zero balance.
Loan Officers need to make sure that they take non-medical collection accounts into account. If a borrower has more than $2,000 in total non-medical collection accounts, you need to take 5% of the unpaid outstanding collection balance and use that figure as part of the borrower’s monthly debt even though they do not have to pay anything. This can be a problem if the outstanding collection account balance is a large amount. For example, if the total sum of all collection account balance is $20,000, then 5% of the $20,000 or $1,000 must be used as a monthly debt when calculating the debt to income ratios of the borrower. However, if the borrower enters into a written payment agreement with the collection agency and/or creditor, then the amount negotiated on the written payment agreement can be used as the monthly debt when calculating the DTI of the borrower. There is no seasoning requirements and the date the written payment agreement is executed, that is the date when the monthly payment amount will go into effect.
Issues With Credit Disputes
Under no circumstances should any loan officers issue a pre-approval letter until the credit disputes has been retracted and the retraction reflects on the borrower’s credit reports. Reason being is that when a borrower disputes any derogatory credit items, the credit bureaus will automatically not count the negative disputed item from the credit score calculations. So whenever a consumer disputes a negative derogatory item, their credit scores will increase because the credit disputed item will not be counted by the credit bureaus. When a consumer retracts the credit disputes and the credit bureaus remove the dispute verbiage from the credit report, the borrowers credit scores will drop. Mortgage loan originators make the assumption that just because the borrowers credit score may be in the mid 600’s and there is only one credit dispute that it is safe to issue a pre-approval letter. This can be a serious mistake because I have seen cases where a borrowers credit scores dropped over 70 FICO points by retracting one credit dispute.
There are cases where borrowers have a hard time retracting credit disputes because either the credit bureaus will take their time or creditors will fight the dispute retraction. If this is the case, here is a link that will help you in getting the credit disputes removed sooner:
Borrowers Who Are Not Credit Qualified
If you have borrowers who are not credit qualified but do qualify with income and other requirements, set up a separate file for them. As long as the borrower has qualified income, you can help borrowers who are not credit qualified. There are many solutions in advising borrowers who do not meet the minimum credit scores. We will cover this topic on another blog.