Credit Documentation

Written By: Frankie Lacy, Op-Ed Writer

There are several forms of credit documentation that underwriters examine to determine creditworthiness of the applicant. The most frequently discussed is the credit report. However, supplementary documentation can be just as illuminating as the primary report when reviewing the borrower’s credit profile.

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Many times, the credit report has erroneous or incomplete information reporting. For example, the mortgage servicer may be running behind in posting payment history to the credit bureau. Student loan accounts are often missing the estimated monthly payment if the loan is deferred. Foreclosures, bankruptcies, and judgments may be missing details, such as the dismissal date. Authorized user accounts may be erroneously reporting a payment history for a borrower who did not credit qualify for the account.

Many loan originators and processors submit letters of explanation to address these issues, but LOX’s are often incomplete or simply insufficient to clear the condition. The best recourse in this situation is to order a credit supplement. The credit reporting vendor can reach out to the loan servicer and get updated information and explanations for defaulted accounts or erroneous reporting. Authorized user accounts can be completely erased from a borrower’s credit report as a result of a credit supplement inquiry.

Another credit reporting tool is the soft-pull or credit comparison report. These are also reports that are requested through the credit vendor. The vendor is able to pull the most up-to-date reporting history on the borrower’s credit profile, including debts that were not reporting on the original credit report. They can compare new tradeline balances and monthly payments to what was on the original report. This allows underwriters to update their analysis of the borrower’s creditworthiness and update debt-to-income ratios if tradeline payments have increased.

In my time as an underwriter, I have discovered new auto loans, student loans, and even mortgages on the credit comparison report. In addition to updating the tradelines, the credit comparison displays any new credit inquiries. This should be examined to determine whether there are any new debts. If new inquiries are reporting, the borrower should provide an explanation and indicate whether they opened a new tradeline as a result of the inquiry.

Usually during the course of underwriting a loan, the borrower submits documentation to verify other loan characteristics that also contain credit information. For example, a bank statement submitted may show a revolving line of credit or auto loan that is not reporting on credit. A mortgage statement on a rental property might display a late mortgage payment that has not posted to credit. A group of W2’s may include a 1099-MISC for debt write-off. This could be an indication of a collection, judgement, or even a bankruptcy that was just discharged.

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For this reason, all documentation provided with the loan must be examined carefully. We want to identify any issues that might have a negative impact on the borrower’s qualifying ratios and ability to repay the loan. Due diligence in this area will yield more informed credit decisions and higher quality loan approvals.


About The Author

Frankie Lacy - As an op-ed writer, Ms. Frankie Lacy is a 15+ year mortgage industry veteran with extensive conventional mortgage underwriting experience. Topics of Frankie's expertise include: Fannie Mae, Freddie Mac, USDA Rural Housing, underwriting to investor overlays, self-employed borrowers, personal and business tax return analysis, rental income, condos/co-ops/PUDs, and more. Frankie is a Davenport University graduate with a degree in Business Administration.

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