By Anne Elliott
It is sometimes tempting to short-cut reading the credit report. Don’t. The score level is not the only pertinent content. The report provides insight into a borrower’s ability to handle the requested mortgage loan in many respects, including:
- Whether the credit history is newly-established or seasoned
- Creditor confidence as reflected in high credit limits
- Whether outstanding consumer debt (i.e., excluding mortgage and business loans) is minimal, moderate, or excessive proportionate to income
- Whether repayment has been timely, irresponsible, or inconsistent
- Whether derogatory credit, if any, is widespread or restricted to certain accounts, and recent or dated. Late consumer debt payments but timely mortgage payments demonstrate prioritization working to the lender’s advantage. Late mortgage payments and timely payments on consumer accounts may indicate questionable prioritization, hardship strategy, or the potential for strategic default if equity is minimal. Be aware that some equity loans are classified as other than “M” (mortgage) accounts.
- Authorized user or disputed accounts that could invalidate the credit score
- Major derogatory credit like bankruptcy, foreclosure or foreclosure equivalent, vehicle repossession, or a severely delinquent mortgage history
- Severely delinquent support obligations reflecting on ability to repay and character
- Fraud alerts to be investigated and cleared before loan closing
- Legal items such as outstanding tax liens to be paid or otherwise resolved before closing
- Whether credit usage is consistent with the borrower’s age (except for those who have lived outside the country) and income level
- Whether address references correspond with the applicants’ residential history and also reflect stability
- Whether employment references correspond with the employment history on the application and evidence multiple positions or growth in one field
- Whether a written explanation by the borrower should be requested
- Whether insufficient established credit requires non-traditional credit or addition of a co-borrower
- On manually underwritten loans or factors indiscernible to the AUS engine, whether loan approval should be granted.
Before credit scoring became an industry tool, credit was described as perfect if there were no derogatory ratings or legal items. FICO’s educational materials allow awareness of indicators other than timeliness and default. Major score triggers include:
Quantity: The number of trade-lines and the types of accounts are relevant. Installment accounts and mortgages carry more weight than revolving accounts. Too many revolving accounts reduce the score level.
Quality: Untimely payments decrease the score. The more delinquent a payment, the greater its impact. Legal items such as bankruptcies and tax liens negatively impact score levels.
Seasoning: Mature accounts have a positive effect on the score level. As derogatory ratings become more dated, their impact on the score gradually decreases.
Utilization: This is the percentage relationship between the account balance and the high credit limit on revolving accounts. The higher the utilization individually and cumulatively, the more financially out of control the borrower appears. Higher credit limits indicate that creditors trust the borrower to repay. They elevate the score level unless an account has high utilization.
Inquiries: A high number of recent inquiries suggests the potential for increased debt and possibly applicant desperation. To be equitable, FICO reduces or “de-dupes” the number of inquiries from mortgage originators and auto dealerships within a short span of time; the borrower is likely shopping for one mortgage or vehicle.
Describing credit and obligations
After reviewing the credit report, the underwriter should have the ability to provide a concise description of credit usage.
Positive terms: seasoned, mature, timely, prudent, as agreed, exemplary, minimal, moderate, restrained, unblemished, prompt, spotless, responsible
Negative terms: unseasoned, shallow, limited, sparse, sloppy, irresponsible, excessive, erratic, major derogatory credit, severely delinquent, severe delinquency, substandard, negligent, subprime
Neutral terms: debt, consumer debt, non-mortgage debt, long-term obligations, timeliness, debt service
Synonyms for untimely payments: lates, derogatory ratings, delinquencies, not as agreed, lapses
Terms quantifying frequency: consistently, periodically, recent, dated, sporadic, isolated, often, rarely, occasionally
Anne Elliott studied mortgage risk throughout her professional career. Her upcoming book, Underwriting with Thought, or An Alternative Approach to Responsible Origination, will be published in early 2017. Contact her at email@example.com