This Article Is About Undisclosed Debt Guidelines On Government And Conventional Loans
Most undisclosed debts will be discovered by lenders during a third-party national public records search. For example, if you have mortgages, bankruptcy, foreclosure, judgments, short sales, and other public records not reporting on your credit report, it will be discovered by the lender. This holds true even though it does not report on your credit report. Many consumers hire credit repair companies in hopes to delete bad credit tradelines and other debt.
There are debts like outstanding collections, late payments, and charged-off accounts that lenders cannot find out. However, public records will get discovered. All lenders will do a third-party national public records search as part of the mortgage process. Credit bureaus are not always accurate in reporting consumer credit tradelines. Most credit tradelines are on consumer credit reports for a period of seven years and then fall off if it is bad credit. This is the exact reason for lenders doing a national public records search on all mortgage loan applicants.
Do Consumers Have To Disclosed Debts Not Reporting On Credit Reports
Lately, we have received numerous phone calls regarding undisclosed debt and the mortgage process. Many clients are unsure of what undisclosed debt means. In short, undisclosed debt means a financial obligation that is not reporting on your credit report. In this blog, we will detail the do’s and don’ts undisclosed during the mortgage process.
Qualifying For Home Loans
When it comes to qualifying for a mortgage, there are three main areas to consider.
- Appraised value/ equity position
- Assets for a down payment
- Debt to income ratio
In this blog, we will focus on debt to income ratio and undisclosed debt guidelines
Credit Scoring Model And Process.
Credit scoring models and credit reporting by the credit bureau are a mystery to most Americans. Each credit bureau weighs in differently when computing credit scores. While they are all very similar, each algorithm is different. There are obvious factors that go into your credit scores such as payment history, utilization, and length of open trade lines. All of these factors create a record of stability demonstrating how you pay your debts. Credit scoring is not the only factor that goes into a mortgage approval. It is important to factor in undisclosed debts into your qualifications. Late payments can kill your mortgage approval. Just because a debt does not report to the credit bureaus, that does not mean the payment history that is irrelevant.
How Mortgage Underwriters Analyze Borrowers Credit And DTI
Lenders must still verify payment history on all undisclosed debts. The debt to income ratio is one of the largest obstacles to obtaining a mortgage. The debt to income ratio is calculated based on housing payments and debts that report to your credit report. During the mortgage process, there is numerous third-party verification that is completed, and undisclosed debt will pop up. It is important to be truthful with your lender and tell them about all the debts you currently pay. When a debt does not report on your credit report it still needs to be factored into your debt to income ratio.
Undisclosed Debt Guidelines On Debts Not Reporting On Credit Report
There are a few reasons the debt may not report. Typically, the debt is so new that it has not been cycled into your credit report yet. You may also have a creditor who does not report to the credit bureaus. Some small installment loans or even auto loans may not report to a free credit report. There are plenty of reasons a lender is concerned about undisclosed debt. It may significantly impact your ability to afford the housing payment resulting in foreclosure.
Types Of Undisclosed Debts
There are two types of undisclosed debt:
- non-mortgage undisclosed debts
- mortgage undisclosed debts
Non-Mortgage Undisclosed Debts
Non-mortgage undisclosed debts:
- This simply means a debt that is not a mortgage that does not report to your credit report but is a financial obligation you are responsible for
- This must be included when completing AUS (automated underwriting system), it is the lender’s responsibility to verify the actual mortgage payment, and resubmit the AUS to include the undisclosed debt in the FHA TOTAL SCORECARD
- The lender must evaluate if the undisclosed debt is being used as part of your down payment
- For example, if you took out an installment loan with a small private company that does not report to a credit bureau and those funds are being used for the down payment, that adds a layer of risk to the total scorecard
You may not be able to close on this mortgage. This is why it is important to be 100% open and honest with your loan officer.
Undisclosed Debt Guidelines: Mortgage Debts
Undisclosed Mortgage Debts:
- When existing debt that is secured by a mortgage is not listed on the credit report the lender must obtain verification of mortgage directly from the servicer
- More importantly, they must include this undisclosed Mortgage Debt in the AUS findings, it must be counted in the FHA total scorecard
- Depending on the results from the verification of mortgage, the lender may need to downgrade to a manually underwritten loan
Below are a few reasons this can occur after receiving the verification of mortgage:
- A current delinquency
- Any delinquencies within the past 12 months of the FHA case number is assigned
- More than two 30-day late payments within the past 24 months of the FHA case number is assigned
Note: At times, verification of mortgage may identify that the mortgage has been modified, at that point the lender must confirm the modification and timeframe since the modification started. During certain modifications, the mortgage debt may no longer report to the credit bureaus.
Undisclosed Debt Guidelines: How Do Lenders Discover Debts Not Reporting On Credit Reports
How do lenders find out about undisclosed debt?
Gustan Cho Associates has been industry-leading experts in the mortgage process. We have been doing this for a long time. As stated above, there is numerous third-party verification that goes into closing a mortgage. During these verifications, an undisclosed debt will show up. We are on the same team as our clients and an open and honest relationship must be established. If you are trying to hide undisclosed debt, chances are your mortgage will not close. Underwriters are on the lookout for consistent payments based on your bank statements. If they noticed a trend in monies being paid that do not report on the credit bureau, questions will arise.
Credit Pulls By Mortgage Underwriters
During the pre-approval process, a lender will verify your credit report.
- This credit report is valid for 120 days
- Meaning your loan must close and fund within that time frame
- As you get closer to the closing table, within 10 days of closing the lender must order a credit refresh
- This is a soft pull to confirm if new debts have been obtained
- It is incredibly important not to have your credit pulled during the mortgage process
- There are instances where you do not have a choice such as a car accident and need to purchase a vehicle
- We encourage you to inform your loan officer before any credit pull
During this credit refresh, you will sign and date a form stating if a new debt was acquired. If you did take out new debt and are not honest about it, this is mortgage fraud and is not to be taken lightly.
Company Licensed In Multiple States With No Lender Overlays
As stated above we are experts in the mortgage process. We are available 7 days a week for any questions regarding mortgages and preparing to qualify for a mortgage. Even with direct advice from a loan officer about not taking out new debt, many borrowers do not listen. If you do take out new debt, you may not close on your home. That new debt may push your ratios over the qualifying limit. Many clients go out and finance furniture before moving in, this is not a good idea. You need a house to put the furniture in so make sure you close on the house before making any large purchases. We have seen it all from clients purchasing Furniture, new vehicles, and even an RV! It is more important than ever that Americans stay within their budget when it comes to housing payments. Please reach out for any clarification regarding undisclosed debt or any other mortgage question.
