Third-Party Search By Mortgage Lenders During Underwriting

Third-Party Search by Mortgage Lenders: What Underwriters Verify Before Closing

This guide covers third-party search by mortgage lenders during the underwriting process. Mortgage lenders will pull three credit reports on every mortgage loan applicant during the mortgage process. The first step in the mortgage process is for lenders to look at borrowers’ credit scores.

Learn how third-party searches by mortgage lenders verify debts, income, assets, employment, public records, and other information before closing.

The credit scores are what decide whether the loan applicant qualifies for a mortgage. To qualify for a 3.5% down payment FHA loan, applicants need a 580 credit score. To qualify for a conventional loan, the borrower needs a 620 FICO.  To qualify for an FHA 203k loan, most lenders will require a 640 FICO due to overlays. Gustan Cho Associates does not have any overlays on government and conventional loans. To qualify for a VA loan, most lenders will require a 620 credit score. The U.S. Department of Veterans Affairs does not have any credit score or debt-to-income requirements. Most jumbo lenders will require a credit score of 700. In this article, we will discuss and cover the third-party search by mortgage lenders during the underwriting process.

Third-Party Search by Mortgage Lenders: What Underwriters Verify Before Closing

A third-party search is when lenders use external data sources, verification providers, credit or public records, or other services to validate information on a mortgage application. This process may include verifying credit, employment, income, assets, debts, identity, public records, or property details.

There is no universal standard for third-party searches in mortgage lending. Each lender follows its own process for verifying loan applications, depending on the loan programs it offers.

Mortgage applicants usually receive a credit report from the lender to help determine eligibility. However, underwriters may also review debts, properties, bankruptcies, judgments, employers, bank deposits, or other items not shown on the credit report. Many applicants do not realize that underwriters review information beyond the credit report. This procedure is a standard part of the mortgage approval process.

Third-Party Search by Mortgage Lenders: What They Check

Mortgage approval is contingent upon multiple factors beyond the applicant’s credit score. Lenders verify the accuracy of submitted information and ensure compliance with the requirements of the selected loan program.

Lenders are required to verify any non-reported liability by Fannie Mae. As a result, a borrower is required to explain any current liability that was not disclosed on the mortgage application and to provide supporting documents.

This guide explains third-party mortgage verification, potential lender findings, the importance of public records, and recommended actions if unexpected results occur during verification. Mortgage requirements vary by loan program, lender, investor, underwriting system, state regulations, and individual circumstances. Discovering unexpected information during third-party verification does not automatically result in mortgage denial.

What is a Third-Party Search by Mortgage Lenders?

A third-party search by mortgage lenders involves verifying information through sources other than those provided by the applicant. Single, combined report for third-party searches. When processing a mortgage, lenders may use sources such as credit bureaus, employment and asset verification services, public and government databases, title companies, settlement service providers, fraud prevention systems, and approved third-party verification services.

Third-Party Search by Mortgage Lenders During Mortgage Underwriting

The types of verification checks depend on the loan program, lender requirements, automated underwriting results, the contents of your loan file, and any inconsistencies that must be addressed. For example, Fannie Mae allows lenders to verify employment using borrower documents, employer documents, or a third-party vendor. Lenders can also verify assets with bank statements, deposits, or approved electronic verification systems. A third-party search is not the same as a credit report.

A credit report may include information on mortgages, credit cards, auto loans, and student loans, as well as payment history, balances, inquiries, collections, and other reported credit obligations.

Some financial obligations or other information may be missing. In some cases, significant debts listed on the mortgage application do not appear on the credit report, so verification is required. Applicants should not disregard financial obligations simply because they are absent from the credit report.

Third-Party Verification Is Not the Same as a Title Search

Evaluating a mortgage borrower and conducting a title search serve different purposes. When evaluating a mortgage borrower, the primary focus is on the borrower’s ability and eligibility to receive financing. A title search reviews the title owner and any potential claims or liens on the property.

According to the Consumer Financial Protection Bureau, a title search is part of the title services ordinarily performed on a mortgage closing.

Fannie Mae requires satisfactory title evidence to confirm the mortgage’s required lien position. In these cases, the two processes overlap because of judgments, tax liens, other mortgage liens, or other recorded obligations.

Third-Party Mortgage Verifications Are Different from Third-Party Title Verifications

The terminology in this process can be confusing. NMLS uses third-party mortgage loan underwriting to describe the review and evaluation of a mortgage application and supporting documents for a loan initiated by another lender for a borrower, which the underwriting company will not fund. That is not the same as the third-party searches and verifications discussed in this article.

Third-Party Verifications Used by Mortgage Lenders

Mortgage lenders must ensure the information used to approve a loan is accurate. Even with a thoroughly completed application, issues may arise during the process that require clarification.

These may include outdated reports, errors, new obligations, changes following preapproval, or discrepancies in how information is reported across databases.

Third-party verifications help lenders confirm important information. These include borrower information, employment status, qualifying income, assets, personal obligations, owned real estate, credit obligations, potential public-record issues, and information pertaining to the lender’s collateral.

Third-Party Search by Mortgage Lenders: Public Records, Debts, and Verification

To prevent mortgage fraud, lenders verify information instead of relying solely on borrower-supplied data. Fannie Mae oversees fraud-prevention, detection, and reporting requirements. The purpose of these checks is not to find reasons to reject borrowers, but to ensure all mortgage requirements are met so the loan can be approved, insured, and sold to investors.

No single database contains all the information about a mortgage applicant. Instead, information is distributed across multiple databases.

To confirm they are working with the actual applicant, lenders must verify the borrower’s identity. For conventional mortgages sold to Fannie Mae, lenders must confirm each borrower’s identity prior to extending credit. Fannie Mae explains that these requirements are consistent with the applicable OFAC and USA PATRIOT Act obligations, as well as other obligations related to information and document verification. Identity verification differs from a criminal background check. A typical mortgage underwriting file focuses on identity, credit, capacity, assets, liabilities, property eligibility, and compliance with the mortgage program.

The Lender is Required to Verify the Following:

• Credit cards
• Installment loans
• Student loans
• Mortgages
• Home equity lines of credit
• Leases, alimony or support obligations (when necessary)
• Other loans that will continually recur and are relevant to the loan program.
• If a debt is added after the original application or was not initially disclosed, it must be included in the loan package.
• Fannie Mae requires the lender to determine relevant information regarding obligations and to verify other obligations that are not reported on a credit report.
• The Identifying a new debt does not automatically result in application denial.
• The key consideration is whether the debt affects eligibility, debt-to-income ratio, available funds, or underwriting outcomes.

Income Verification by Mortgage Lenders

Employment verification is a key area where third-party data is used. gage applicant can be approved based solely ond on employment income if that income meets the underwriting requirements.

The lender may verify income via pay stubs, W-2 forms, tax returns, employer-provided verification, electronic verification services, etc., as permitted by the mortgage program.

For Fannie Mae loans, employment income must be verified, and a third-party employment verification vendor is one permitted source.

Can Your Employment Be Checked Again Before Closing?

Yes, your employment can be checked again before closing. Applicants should not assume employment verification is complete just because the mortgage has received preliminary or conditional approval.

For Fannie Mae loans serviced by employment income, verbal verification of employment must generally be completed close to the note date unless an allowable alternative or applicable validation satisfies the requirement.

The reason is to confirm the borrower has not materially changed employment prior to loan closing. Applicants should consult their loan broker before making changes to employment status, work hours, or compensation.

Verification During Mortgage Underwriting

During mortgage underwriting, the underwriter may request verifications of funds for the down payment, closing costs, reserves, and other related funds. Verification could come from bank statements, investment statements, verification-of-deposit forms, or approved electronic asset-verification technology.

For conventional loans subject to Fannie Mae requirements, bank statements used for asset documentation must identify the institution and borrower and contain the required account and transaction information.

Lenders require evidence that accounts have sufficient funds and, importantly, that these funds come from acceptable sources. An underwriter may also need to confirm the source of funds. For instance, a large deposit could represent savings, the sale of an asset, a gift, a transfer from another verified account, a bonus, or another acceptable source. It could, however, represent borrowed money or an undisclosed obligation that changes qualification.

What Mortgage Lenders Find During Third-Party Verification Searches

Unexplained deposits often prompt additional questions or conditions during underwriting, as their sources must be verified. This aspect of third-party searches is often misunderstood. Applicants should not assume that information missing from a credit report is inaccessible to lenders. Information may not exist in one place that exists in another. An example would be a self-reported court record and a bankruptcy record, or a court record and a title record, or a credit reporting record and a government record.

Finding Records Not on Credit Report 

A mortgage lender should look for information from credit reporting agencies and legal searches, including potential judgments, foreclosures, liens, and bankruptcies.

Fannie Mae agrees that derogatory credit events may not be reported fully and accurately by all credit grantors and, in turn, not reported by all credit agencies.

In such situations, lenders may require additional documentation. This does not mean a third-party record vendor can obtain every public record in the United States; a credible mortgage resource would not make such a claim. Public records can be incomplete, contain errors, or be mismatched. They may be sealed, associated with someone with the same name, recorded in a different jurisdiction, or simply not accessible in a particular database.

What Public Records are Most Important in a Mortgage Application?

The impact on the underwriting decision will depend on what was discovered, whether it is related to the borrower, the current status of the discovery, the mortgage program, and how it relates to the transaction.

Bankruptcy Records

Bankruptcy is a clear example of how information from public records may impact the underwriting decision. To further complicate matters, certain mortgage programs may have specific guidelines regarding bankruptcies filed under Chapter 7, Chapter 11, Chapter 12, or Chapter 13.

The Uniform Residential Loan Application also includes a line for mortgage applicants to indicate whether they have filed for bankruptcy in the previous seven years and, if so, to what extent.

Even if a bankruptcy does not appear on a credit report, bankruptcies disclosed on application forms require lenders to collect bankruptcy documents to determine how to proceed with the application. If there is conflicting information, underwriting may pause until the issue is resolved.

Outstanding Judgments

The current version of the Uniform Residential Loan Application includes a question for mortgage applicants about whether they have outstanding judgments. Not having a judgment does not mean that a borrower is ineligible for a mortgage. First, the underwriter must determine whether the judgment belongs to the borrower, if it is still outstanding, and what the mortgage program requirements are. If the judgment is relevant to the program, the underwriter must decide whether it creates a debt or lien. A judgment issued to someone with a similar name should not be attributed to the applicant without proper verification.

Tax and Other Liens

In many cases, judgments that have been placed on the borrower can affect the borrower’s ability to get a mortgage, as can other liens placed on the property. A lien on the property can hurt the mortgage lender’s placement. According to Fannie Mae, the title policy must include any other liens on the property and show the correct order of the mortgages taken out.  How a tax lien or any other recorded lien is handled depends on the circumstances and the mortgage program.

Foreclosures, Deeds-in-Lieu and Short Sales

For mortgage underwriting, prior foreclosure-related circumstances can be considered. The Uniform Residential Loan Application, which is currently used, asks for information concerning deeds-in-lieu of foreclosure, pre-foreclosures or short sales, as well as foreclosures, during the indicated time frames. However, use caution when referring to these items as “public records.”

There are a number of sources, such as mortgage tradelines, borrower statements, servicing and property records, and supporting documents, where information concerning a mortgage transaction can be obtained.

This distinction makes the article more precise than describing every adverse mortgage action as the result of a search of the court record.

How Does Third-Party Search by Mortgage Lenders Work

Third-party search by mortgage lenders refers to the process of mortgage lenders conducting a search or review of a borrower’s credit, financial, and personal information through third-party sources. Mortgage lenders use this information to assess a borrower’s creditworthiness and eligibility for a mortgage loan. Mortgage lenders will obtain a copy of the borrower’s credit report from one or more major credit bureaus, such as Equifax, Experian, or TransUnion. This report contains information about the borrower’s credit history, including credit scores, payment history, outstanding debts, and any derogatory marks.

Income and Asset Verification By Mortgage Lenders

Lenders may verify the borrower’s income and employment status by contacting the borrower’s employer or through third-party verification services. This helps ensure that the borrower has the means to make mortgage payments.

Borrowers should be prepared to provide the necessary documentation and information to facilitate these searches when applying for a mortgage.

Lenders may also verify the borrower’s assets, such as bank account balances, investment accounts, and other financial assets. This is done to confirm the borrower’s ability to cover the down payment and closing costs. Some lenders may perform background checks on borrowers to check for any criminal history or other potential red flags.

What is the Purpose of Third-Party Search By Mortgage Lenders

While not directly related to the borrower, lenders typically order a property appraisal to determine the value of the home being purchased. This is important for determining the loan amount and loan-to-value ratio. Depending on the lender and the loan program, additional third-party searches and verifications may be conducted.

The purpose of these third-party searches is to assess the risk associated with lending to a particular borrower and to ensure that the borrower meets the lender’s eligibility criteria.

Lenders may check for any outstanding liens or judgments against the borrower. The information gathered during these searches helps lenders make informed decisions about whether to approve a mortgage application and what terms and interest rates to offer. It’s important for borrowers to be aware that these third-party searches are a standard part of the mortgage application process, and they play a significant role in the lender’s decision-making process.

Non-QM and Alternative Mortgage Options

Gustan Cho Associates offers non-QM jumbo mortgages with credit scores down to 620. Besides the credit score, lenders will carefully review borrower’s credit reports. Underwriters will pay special attention to collection accounts, late payments, tax liens, judgments, bankruptcy, foreclosures, deed in lieu of foreclosures, and short sales.

All third-party search by mortgage lenders is done by hiring third-party vendors such as Data Verify or Lexis Nexis or some other third party search companies.

Special emphasis will be on looking for public records. Third-party search by mortgage lenders will be done on every mortgage loan file to detect mortgage fraud. Third-party search by mortgage lenders will also detect public records and debts such as judgments or liens that are not reported on the credit bureaus.

How Credit Repair Impact Third-Party Search By Mortgage Lenders

It is highly recommended borrowers review their credit report and check to see if they can improve their credit scores and repair their credit prior to applying for a mortgage loan. Many use the services of credit repair companies and credit repair does work. However, there are times where credit repair can do a lot of damage and backfire.

A credit repair company can remove derogatory information such as older collection accounts, charge-offs, late payments, repossessions, and other derogatory items.

Surprisingly, I have seen many credit repair companies remove public records such as bankruptcies, foreclosures, deed in lieu of foreclosure, short sale, tax liens, judgments, delinquent student loan accounts, and delinquent child support payments. Third-party search by mortgage lenders cannot detect deletions of collection accounts, charge-offs, and late payments since they are not public records.

Results of Third-Party Search By Mortgage Lenders

Let’s take a case scenario on a borrower who has several unsettled judgments on their credit report. Some credit repair companies can get those unpaid judgments off the consumer’s credit report. When a loan officer pulls all three credit reports, the unpaid judgments will not show up on the credit report if the credit repair company got them deleted through credit repair. The loan originator will submit the application to processing and underwriting with a clean credit report.

During the mortgage underwriting process, the mortgage underwriter will hire a third-party vendor like Data Verify or Lexis Nexis to do a third-party search by mortgage lenders on the applicant.

There is no way of finding out derogatory deletions such as late payments, unpaid collection accounts, charge-off accounts, or other negative derogatory credit accounts that are not filed with public records. Third-party vendors will find out derogatory items that have been filed on public records that are off the consumer’s credit report.

The Mortgage Application Declarations Are Important

It is essential for applicants to provide accurate and honest information when completing the mortgage application. Section 5 of the current version of the Uniform Residential Loan Application asks the applicants questions pertinent to underwriting.

The borrower is required to acknowledge that the information provided is true and accurate, and that any material change must be disclosed prior to closing.

Borrowers are obligated to provide information about any new credit established since the application was completed, mortgages on other properties, co-signed mortgages, outstanding judgments, unpaid government debt, lawsuits with potential financial responsibility, deeds in lieu, short sales, foreclosures, and bankruptcies.

Speculating About What the Lender May Find Introduces Unnecessary Risk

If an applicant cannot respond to a declaration due to a unique or complex history involving debt, bankruptcy, foreclosure, lawsuit, judgment, property, or credit obligation, it is advisable to notify the loan officer prior to final underwriting. It is much harder to address last-minute issues during the mortgage process than to provide clear explanations up front.

Credit Repair Cannot Hide Bankruptcies, Judgments, or Foreclosures?

Consumers need to appreciate the distinction between a credit report and a legal record. Consumers have the right to dispute a credit report that contains inaccurate information.

The CFPB notes that unfavorable, but accurate, information is not subject to removal. Information that is inaccurate, incomplete, belongs to another person, is the result of identity theft, or is unverifiable is treated differently.

In addition, removal or correction of information from a credit report may not eliminate the underlying court, bankruptcy, title, or other official record. For example, changing how a bankruptcy is reported by a credit agency will not erase the bankruptcy record. Therefore, applicants should not rely solely on credit monitoring service reports when completing a mortgage application.

Finding Undisclosed Information is Not an Automatic Basis for Denying a Mortgage Application

The underwriter will assess the new information and confirm whether the information is accurate. Requesting an explanation, providing court documents, verifying a record belongs to someone else, adding a new unreported debt, documents that a debt has been satisfied, proving a lien has been removed, updating the mortgage application, re-running the automated underwriting, assessing if the appellate waiting period has been satisfied, or assessing if the mortgage guideline has been satisfied are examples of the different outcomes.  Fannie Mae requires documentation/explanation for liabilities reported on the credit report that were not disclosed on the loan application. The main concern is not that the lender found something, but whether it affects the eligibility of the current application.

Does New Debt Before Mortgage Closing Create Problems For Mortgage Processing?

Yes, it does. Borrowers must avoid all unnecessary credit pulls while their loans are processing. The Uniform Residential Loan Application asks about new credit pulls that are not disclosed on the application and will be done prior to closing.

Car loans, personal loans, credit card loans, mortgages, lines of credit, co-signed loans, or other financial obligations not disclosed on the application will likely affect your monthly debt payments.

This cThis can negatively affect your debt-to-income (DTI) ratio and may require additional underwriting before your mortgage is approved.ie Mae states that if the borrower incurs debt after underwriting, the lender must recalculate the DTI. If the lender conducts a credit check post-underwriting, they must conduct a full underwriting again. Therefore, it is essential to avoid opening new credit accounts before mortgage closing.

Is a Third-Party Search Always Ordered by Mortgage Lenders?

  No single company is used by all lenders for third-party searches. Conventional loans sold to Fannie Mae and Freddie Mac can have one set of documentation and verification requirements. FHA loans are governed by HUD’s FHA Single Family Housing Policy Handbook 4000.1.

VA loans also have their own guidelines. USDA loans have their own requirements. Jumbo and non-QM mortgage programs can have investor-specific guidelines.

Individual lenders may have additional underwriting requirements, or lender overlays, as long as they comply with applicable laws and investor requirements. Lenders also use different technology for these checks. One lender may collect information using an approved validation service, while another lender may use a verification service.

The Primary Consideration is Not the Following:

• “Does every lender run the same search?”

Instead, the Pertinent Question is:

• “What information must this lender verify to confirm that this mortgage meets the lender’s underwriting requirements?”

Third-Party Searches Are Not Automatic Mortgage Denials

A common problem with older online mortgage information is that it often provides absolute answers to underwriting questions.

• “Judgment equals denial.”
• “Bankruptcy equals denial.”
• “Collection equals denial.”
• “Public record equals denial.”

However, an applicant may have a bankruptcy but still meet waiting-period requirements. An old judgment may have been resolved. A lien could belong to another individual. A foreclosure may be old enough to allow qualification. Even undisclosed debt may not exceed the allowable debt-to-income ratio. On the other hand, even borrowers with good credit can run into problems if a new obligation arises that affects their ability to qualify.

• Imagine an applicant for a conventional loan.
• The borrower’s credit report has no outstanding judgments, and the borrower answers No to the judgment question on the Uniform Residential Loan Application.
• Before using the judgment as a basis to deny the loan, the underwriter must determine whether it actually pertains to the borrower.
• Documentation may resolve the issue if this judgment was issued to someone with the same name as the borrower.
• If the judgment was issued to the borrower but has been satisfied, the borrower may submit a satisfaction or release document.
• If the judgment is not satisfied, the underwriter must consider whether the loan guidelines require the judgment to be treated a certain way.
• If the judgment creates another monthly obligation, the borrower’s qualification would need to be redone.
• If the borrower knowingly withheld this information, it could cause more issues.
• Therefore, comprehensive disclosure at the beginning of the mortgage process is essential.

What Borrowers Can Do To Minimize Third-Party Verification Issues

Thorough preparation by the applicant leads to a more efficient underwriting process. Applicants should review all three credit reports for errors prior to applying. Upon application, disclose all properties, mortgages, co-signed obligations, judgments, bankruptcies, foreclosures, alimony or child support, and any other financial obligations requested.

Do not omit disclosures based on the absence from a credit report. Avoid opening new credit accounts without consulting the loan officer. Maintain records for all transfers and significant deposits.

Respond promptly to documentation requests from the mortgage processor. Inform the loan officer of any changes in employment, income, assets, debts, or living situation before closing. If a public record belonging to another individual appears in the file, provide documentation to clarify ownership. An unblemished credit history does not always mean a comprehensive mortgage file. Often, the most complete mortgage file is one where the applicant proactively provides all relevant documentation before the underwriter requests it.

Third-Party Searches on FHA, VA, USDA, and Conventional Loans

Most borrowers mistakenly believe that switching mortgage programs bypasses credit and public-record issues. This assumption is incorrect. All programs – FHA, VA, USDA, and conventional – have their own underwriting guidelines, but all require an evaluation of information to determine eligibility.

For example, FHA’s authoritative underwriting guidelines are outlined in HUD Handbook 4000.1, whereas VA credit underwriting is governed by the VA Lenders Handbook and relevant VA guidance.

If you can’t qualify for one mortgage program, you might still qualify for another because each has different guidelines. This approach is different from seeking a lender who will overlook material facts. Experienced loan officers can usually determine which mortgage program best fits the borrower’s situation before the purchase contract is at risk.

Most Mortgage Problems Occur Because the Real Issue is Not Identified Early in the Process.

• It’s usually not just the original credit issue.
• An experienced loan officer will look at your full financial situation before sending your loan to underwriting.
• This is especially important for borrowers with prior bankruptcies, foreclosures, judgments, liens, high DTI, credit report issues, irregular income, significant assets or properties, self-employment, rapid employment changes, or previous manual underwriting or denial scenarios.
• These borrowers often need to provide more documentation, choose a different loan program, or find a lender whose requirements fit their situation.
• The objective is not to conceal the issue, but to resolve it before closing to prevent complications.

Discovery of Public Records Through Third-Party Search By Mortgage Lenders

If the mortgage loan closes and funds and borrower defaults on their loan and the lender finds out that they were deceived due to the borrower lying on their mortgage loan application, then it is another matter. The mortgage lender can call the loan due and the borrower can get in trouble for mortgage fraud. To qualify for an FHA loan with a lender with no overlays, please contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.

Final Thoughts on Third-Party Search by Mortgage Lenders

Applicants should not be unduly concerned about third-party searches conducted by mortgage lenders. Mortgage underwriting centers on verification. Credit reports are important, but they are only one part. Lenders also check employment, income, assets, debts, identity, property, title, and other records.

A common mistake is assuming that an old debt, bankruptcy, judgment, property, mortgage, or obligation is irrelevant simply because it does not appear on a credit report.

Applicants should provide complete and honest disclosures. Subsequently, allow the loan officer and underwriter to determine the impact on mortgage eligibility. These challenges, including bankruptcies, foreclosures, and high debt-to-income ratios, do not necessarily preclude qualification for a mortgage if the situation is properly documented and an appropriate loan program is selected.

Author: Gustan Cho, NMLS 873293

Frequently Asked Questions for Third-Party Search by Mortgage Lenders