Chapter 11: Credit Report Review


Overview

A credit report is one of the key components in determining a borrower’s creditworthiness. It gives a detailed history of a borrower’s financial behavior, including outstanding debts, repayment habits, and public records. This chapter focuses on how mortgage underwriters review and interpret credit reports during the underwriting process.

Section 1: Understanding the Credit Report

1.1 Purpose of a Credit Report

  • Evaluate borrower’s repayment history
  • Identify current and past credit obligations
  • Assess risk and likelihood of loan repayment

1.2 Credit Bureaus

  • Equifax
  • Experian
  • TransUnion

Each bureau may report slightly different data depending on lender submissions.

1.3 Types of Reports

  • Tri-Merge Credit Report: Combines data from all three bureaus
  • Soft Pull vs. Hard Pull:
    • Soft pull: No effect on credit score
    • Hard pull: May impact credit score slightly

Section 2: Key Components of a Credit Report

2.1 Personal Information

  • Name
  • Date of birth
  • Social Security number
  • Current and previous addresses
  • Employment history

2.2 Credit Accounts (Trade Lines)

  • Revolving (credit cards)
  • Installment (car loans, student loans)
  • Mortgage accounts
  • Each trade line includes:
    • Creditor name
    • Account number (masked)
    • Balance
    • Credit limit or original loan amount
    • Payment history (30/60/90-day lates)

2.3 Credit Inquiries

  • Hard inquiries over the past 2 years
  • Too many inquiries can lower score

2.4 Public Records and Collections

  • Bankruptcy
  • Foreclosure
  • Judgments
  • Tax liens
  • Collection accounts (medical, credit card, utility bills)

Section 3: Credit Score Analysis

3.1 FICO Score Ranges

  • 800–850: Exceptional
  • 740–799: Very Good
  • 670–739: Good
  • 580–669: Fair
  • Below 580: Poor

3.2 Score Factors

  • Payment history (35%)
  • Credit utilization (30%)
  • Length of credit history (15%)
  • New credit (10%)
  • Credit mix (10%)

3.3 Score Thresholds for Loan Programs

  • Conventional: 620+
  • FHA: 580+
  • VA: No minimum, but typically 620+
  • USDA: 640+

Section 4: Underwriter’s Review Process

4.1 Verifying Accuracy

  • Confirm borrower identity details
  • Match debts with borrower disclosures (1003 form)
  • Check for undisclosed liabilities

4.2 Evaluating Credit Behavior

  • Look for late payments, especially recent or severe (90+ days)
  • Review length of established credit lines
  • Identify high credit utilization (over 30% utilization is a risk factor)

4.3 Handling Discrepancies

  • Request Letter of Explanation (LOE) for:
    • Derogatory accounts
    • Recent late payments
    • Credit inquiries for new loans

4.4 Automated Underwriting System (AUS) Flags

  • DU (Desktop Underwriter) or LP (Loan Product Advisor) may flag risk
  • Underwriter must investigate AUS findings tied to credit issues

Section 5: Red Flags and Common Issues

5.1 Recent Credit Inquiries

  • Check if borrower opened new debts
  • Ask for documentation or confirmation if debt was not opened

5.2 Undisclosed Liabilities

  • Personal loans or credit cards not listed in 1003
  • Underwriter must reconcile with borrower

5.3 Derogatory Credit History

  • Collections: Request paid-in-full letters or payment plans
  • Bankruptcies:
    • Chapter 7: Must be discharged for at least 2 years
    • Chapter 13: Payment history reviewed, court approval needed
  • Foreclosures:
    • Must be seasoned per loan program (e.g., 3–7 years)

5.4 Identity Theft or Fraud Alerts

  • Review fraud alerts carefully
  • Request additional identification verification

Section 6: Documentation and Follow-Up

6.1 Required Supporting Docs

  • LOE (Letter of Explanation)
  • Proof of paid collections
  • Court documents for bankruptcy/foreclosure
  • Debt confirmation letters for inquiries

6.2 Credit Supplements

  • Used to update trade lines or confirm balances/status
  • Obtained through credit reporting vendor

6.3 Re-Pulling Credit

  • May be required if initial credit report is outdated (60–90 days)
  • Always obtain borrower’s consent

Section 7: Case Studies

Case 1: Undisclosed Auto Loan

  • Borrower had recent inquiry; underwriter requested LOE
  • Borrower confirmed loan was not taken
  • File documented with confirmation from lender

Case 2: Collection Dispute

  • Borrower disputed old utility collection
  • Underwriter required letter from collection agency
  • Loan closed after resolution

Case 3: Identity Theft

  • Borrower had accounts opened fraudulently
  • Police report and fraud affidavit provided
  • Underwriter excluded affected accounts from ratios

Final Notes

  • Accurate credit report review is vital to risk assessment
  • Underwriters must be diligent in verifying and documenting discrepancies
  • Transparency and borrower communication are key

Comments

Post a Comment

Popular posts from this blog

US Mortgage Underwriting

  Mortgage Underwriting A–Z Guide Table of Contents Introduction to Mortgage Underwriting The Mortgage Loan Lifecycle The Four C’s of Underwriting 3.1 Credit 3.2 Capacity 3.3 Capital (Assets) 3.4 Collateral (Property) The 1003 Mortgage Loan Application Form (URLA) 4.1 Borrower Information 4.2 Employment & Income 4.3 Assets and Liabilities 4.4 Declarations 4.5 Loan and Property Information Credit Report Evaluation 5.1 Tradelines 5.2 Inquiries 5.3 Public Records 5.4 Credit Scores Income Analysis 6.1 Wage Earners 6.2 Self-Employed Borrowers 6.3 Rental and Investment Income 6.4 Other Sources of Income Asset Review 7.1 Bank Statements 7.2 Gift Funds 7.3 Retirement & Investment Accounts Property Appraisal and Collateral Eval...
Read more