Chapter 5: Credit Reports and Analysis

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Overview

Credit analysis is a vital component in the mortgage underwriting process. It enables lenders to assess a borrower’s creditworthiness and identify the likelihood of timely repayment. This chapter deeply examines the structure, components, and interpretation of credit reports, and the way underwriters assess risk based on credit data.

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Section 1: Introduction to Credit Reports

What is a Credit Report?

A credit report is a detailed record of a borrower’s credit history compiled by credit bureaus. In mortgage underwriting, a tri-merged credit report from Experian, Equifax, and TransUnion is typically used.

Purpose in Underwriting:

• Evaluate payment patterns
• Assess credit behavior
• Determine risk and pricing
• Identify fraud or discrepancies

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Section 2: Structure of a Credit Report

1. Borrower Information:

• Full Name
• Date of Birth
• Social Security Number
• Current and previous addresses
• Employment details

2. Public Records:

• Bankruptcies (Chapter 7, 11, 13)
• Foreclosures
• Tax liens
• Civil judgments

3. Tradelines:

• Account types (mortgage, auto, revolving, installment)
• Creditors' names
• Account numbers (masked)
• Date opened
• Balance
• Monthly payment
• Payment history
• Status (open, closed, charged-off, etc.)

4. Credit Inquiries:

• Hard inquiries (impact score)
• Soft inquiries (do not impact score)
• Inquiry dates

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Section 3: Credit Score (FICO/Beacon)

Credit Score Ranges:

Score Range	Credit Rating
800–850	Exceptional
740–799	Very Good
670–739	Good
580–669	Fair
< 580	Poor

Factors Influencing Credit Score:

• Payment History (35%)
• Credit Utilization (30%)
• Length of Credit History (15%)
• Types of Credit (10%)
• Recent Credit Inquiries (10%)

Credit Score Usage:

• Pricing the loan (interest rate)
• Loan eligibility (conventional, FHA, VA)
• Risk layering

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Section 4: Red Flags and Risk Indicators

Common Red Flags:

• 30/60/90+ day late payments
• Collections or charge-offs
• Recent multiple inquiries
• Disputed tradelines
• Accounts in forbearance or deferment
• Authorized user accounts only

Public Record Issues:

• Chapter 7: Liquidation bankruptcy (stays 10 years)
• Chapter 13: Repayment bankruptcy (stays 7 years)
• Foreclosure: Major derogatory
• Judgments/Liens: Must be cleared or subordinated

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Section 5: Credit Analysis Techniques

Review Steps:

1. Verify identity data matches 1003
2. Examine account status and dates
3. Count and verify active tradelines
4. Identify revolving vs installment debt
5. Evaluate recent delinquencies
6. Match payment history to income stability
7. Investigate inquiries (ask for LOEs if needed)

Tradeline Analysis:

• Mortgage history is most critical
• Installment loans show responsibility
• Revolving accounts reveal credit management

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Section 6: Credit Supplements and Explanations

When to Request a Credit Supplement:

• Missing data
• Account disputes
• Balance inconsistencies

Letter of Explanation (LOE):

Used to clarify:

• Late payments
• Inquiries
• Collections
• Bankruptcies
• Fraud alerts

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Section 7: Guidelines Per Loan Type

Conventional:

• Minimum 620 FICO (most cases)
• Manual underwrite needs compensating factors

FHA:

• Minimum 580 for 3.5% down
• Below 580 = 10% down required

VA:

• No minimum score set by VA (lender overlays apply)
• Focus on clean 12-month payment history

USDA:

• 640 minimum typically
• Credit waivers possible in rare cases

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Section 8: Re-Scoring and Credit Repair

Re-Scoring Options:

• Rapid re-score (for updated balances/payoffs)
• Only factual updates allowed

Common Repair Methods:

• Disputing errors
• Paying down balances
• Removing authorized user accounts
• Clearing collections (caution: may drop score)

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Section 9: Automated Underwriting Systems (AUS) and Credit

FNMA DU and FHLMC LPA Factors:

• Credit score
• Number of tradelines
• Mortgage history
• Delinquency timing
• Bankruptcy/foreclosure seasoning

AUS Recommendations:

• Approve/Eligible
• Refer/Eligible
• Refer with Caution

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Section 10: Credit Case Studies

Case 1: High DTI but Strong Credit

• Outcome: Approval with compensating factors

Case 2: Low Score, Disputed Accounts

• Outcome: Manual underwrite, LOE required

Case 3: Bankruptcy 3 years ago

• Outcome: Allowed under FHA with re-established credit

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Final Notes

• Always cross-reference the credit report with income and asset documents.
• Document all anomalies with letters of explanation.
• Ensure consistency across 1003, credit report, and supporting docs.

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