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   ARTICLE   |   From Scotsman Guide Residential Edition   |   May 2017

Painting a Full Credit Picture

Not all borrowers fit into traditional risk categories

r_2017-05_Blazek_spotHelping borrowers purchase the home of their dreams or refinance their existing home often comes down to their credit score. Ads and articles all talk about the importance of credit scores for obtaining mortgage loans, but how often do you meet with clients, pull their credit, and immediately identify possible difficulties in getting them approved for a loan? Too often, right?

There are programs out there to help most borrowers improve their credit rating, but there are people who may not fit the normal lending model — that no amount of credit repair will help. These scenarios prove that it is not enough anymore to simply look at a borrower’s credit score. Originators also must look at the bigger picture of their credit history.

When underwriters review a credit report, they analyze overall debt obligations, pay history, recently opened accounts, new inquiries and high use of revolving debt, but the automated underwriting system, or AUS, plays an important role in qualifying borrowers, too. It is typically only on manually underwritten loans where an underwriter needs to analyze a borrower’s credit in more detail.

In these cases, underwriters must ask: Did that borrower have a disregard for financial obligations or an inability to manage debt? Or, was there a major event in the life of the borrower that could be considered an extenuating circumstance?

Extenuating circumstances

Good borrowers with the aptitude for repaying debt may have a lower credit score because of extenuating circumstances, which are classified as being “the result of circumstances beyond the borrower’s control.” Each agency looks at specific extenuating circumstance differently, so it is important to review their guidelines.

Some general examples of extenuating circumstances include loss of job, loss of wage earner, or serious illness. In these situations, borrowers must document the events. This can be an overwhelming process for some borrowers, which may extend the time it takes to complete the loan, but originators who help borrowers gather thorough documentation before the loan goes to underwriting actually help these borrowers close on their home more quickly.

One extenuating circumstance originators might come across are borrowers who lost their jobs and homes during the mortgage meltdown and had their credit scores damaged as a result of this financial loss. Although many people have recovered from the Great Recession, others have not.

When one of these borrowers comes looking for a mortgage, do you turn them away or provide the guidance they need to get back on track? The truth is, mortgage loan originators should never turn borrowers away outright even if they cannot see a path to homeownership today for that client. Instead, take the time to help borrowers get back on their feet by educating and guiding them on how to improve their credit and financial circumstances so they can eventually qualify for a loan.

For those borrowers who need a little extra help, originators can refer them to a reputable credit repair agency. Providing education and guidance builds a trusting relationship between the originator and the borrower, which makes them much more likely to come back after they have fixed their credit than if they had been simply turned away in the first place.

Think of this as playing the long game with these borrowers. You may not get the instant gratification of closing a deal now, but it will be worth it when these unqualified borrowers have the keys to their own home after you helped them overcome their obstacles.

Helping millennials

Another group of borrowers that often have credit score issues that make it tough to qualify them for a loan are millennials. Many millennials who have graduated from college or graduate school are facing high amounts of student loan debt and — at the same time — are struggling to find jobs in their career field.

Even worse, without high-paying jobs in their field of choice, some millennials are left to rely on credit cards, which can further destroy their credit if they cannot pay their balances on time, only make minimum payments, or can’t pay at all and default on their credit. This is a typical narrative heard often in the mortgage industry, but not all millennials fit into this category.

Trended credit reporting looks at payment and spending patterns, rate surfers or consolidations, seasonal users and individuals that frequently open and close accounts.

There are millennials out there who would like to purchase a home and have good jobs, favorable credit scores, limited revolving debt and even have consolidated their student loans to reduce payments. Yet, many of these good-risk borrowers still feel that if they were to purchase a home today — with the amount of student-loan debt they still have — that they would be overextending themselves.

These are the type of potential borrowers that originators can educate and guide over time to ensure they maintain their good credit history so that when they feel they are in a better position to purchase a home, they will return to apply for a loan.

 At a Glance

Changes coming from the credit bureaus

Equifax, Experian and TransUnion plan to stop reporting civil judgments and tax liens within consumer credit reports, if those judgments or liens are lacking certain information or are not updated regularly. This change is expected to go into effect July 1 of this year and could affect a large number of consumers. Judgments and liens often have a negative impact on a borrower’s credit score, so eliminating incomplete or outdated filings from credit reports may actually boost many borrowers’ credit scores. This is good news for borrowers, but may make it more difficult for underwriters to evaluate risk. This could be a hot topic this year.

It is important that we, as an industry, do not put all millennials into one category and dismiss them altogether. Each person’s credit is based on different experiences and situations, and originators must understand that the journey to homeownership is unique for each borrower rather than use a “one size fits all” approach. This is where a new way to look at credit history — trended credit — can help.

Trended credit

Last year, Fannie Mae started requiring credit vendors to report on trended-credit data to be used as part of evaluating a borrower’s credit history through AUS. Trended-credit data is a two-year historical perspective on a borrower’s utilization of credit. This provides a more in-depth analysis of the borrower’s credit history and payment trends.

Trended credit reporting looks at payment and spending patterns, rate surfers or consolidations, seasonal users and individuals that frequently open and close accounts. According to Fannie Mae, this reporting will improve the accuracy of Desktop Underwriter’s (DU’s) credit-risk assessment, and will benefit borrowers who regularly pay off their revolving debt.

Fannie Mae also has indicated that this process will not impact the percentage of approve/eligible recommendations, the process of ordering credit reports, or lenders’ responsibility for reviewing credit reports underwritten through DU. Lenders are not even responsible for reviewing the trended data provided on the credit report.

In fact, many lenders have opted to not show trended-credit data on their credit reports, but it is available if needed to get a fuller picture of the credit risk posed by a borrower. A borrower who pays off a revolving debt in full each month, for example, is considered a lower credit risk in the DU risk assessment than one who only pays the minimum due each month.

Credit scoring models have always been a part of Fannie Mae’s AUS, but it was mainly driven by the FICO score at first. Since that time, Fannie Mae has continually advanced their module to assess borrower creditworthiness. The enhancements credit-reporting agencies have made by adding trended-credit data allow Fannie Mae to better evaluate each borrower’s willingness to repay.

By utilizing this data, originators, underwriters and lenders can be better equipped to evaluate a borrower’s true creditworthiness. Whether that borrower is recovering from the economic crisis or a millennial struggling with student-loan debt, this new tool may ultimately help more borrowers achieve their dream of homeownership. 


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