The quality of an individual’s credit serves as a window into their creditworthiness. Individuals who are consistently or, even occasionally, late paying their credit obligations (and, by late, I’m referring to failing to remit the payment during the month in which it is due), who utilize more than 30% of a credit line’s available credit, who default on credit obligations, utilize numerous credit accounts, and even have limited-to-no credit all present potential signs of possessing a problematic credit character. When a lender considers lending hundreds of thousands of dollars to an applicant seeking to finance a home, it is perfectly reasonable for that lender to demand a realistic expectation of reparation. After all, home lenders are in the business to lend, not amass properties through foreclosure.
In addition to the activity appearing on a potential borrower’s credit profile, one of the most important components is their credit score. The credit score represents a measurement or snapshot of that particular individual’s credit quality with 300 representing the lowest achievable credit score and 850 exemplifying the highest.
Credit scores regularly change based on the consumer’s credit-related behavior. Consumers who regularly utilize credit typically have three credit scores, one from each of the three major consumer reporting agencies Experian, Equifax, and Trans Union.
Lenders typically balk at lending to any applicant whose credit score falls below 620. The minimum allowable credit score required to approve a particular type of mortgage loan application, however, is typically based on several factors. These factors include the parameters and risk tolerances of the particular mortgage product being sought, whether the loan’s interest rate is fixed or adjustable, the loan’s LTV, CLTV, and TLTV, and various other considerations. For a specific description of the minimum allowable credit scores based on all of the various parameters, please review the Eligibility Matrix contained within the Fannie Mae Selling Guide Section B3-5.1-01.
With certain exceptions, the representative credit score is the credit score that the underwriter will consider when underwriting a mortgage loan application. The representative credit score refers to the middle of the applicant’s three credit scores. Let’s consider the following example. If an applicant’s credit scores are 633, 740, and 695, the representative credit score on which the underwriter should base his or her decision to lend is 695. If multiple applicants appear on an application, all applicants’ middle scores will be compared and the lowest of all applicants’ middle scores will become the representative credit score used for underwriting purposes. After all, a chain is only as strong as its weakest link. If an applicant only has two credit scores, the lower of the two will be used. An applicant possessing no scores or only one may prove challenging to underwrite and may be required to explore non-traditional credit options.
Effective October 5, 2022, although Fannie Mae’s automated underwriting system Desktop Underwriter (DU) will continue to determine the credit score used when underwriting all conventional loan applications submitted through it, underwriters will be required to consider the average median credit score when manually underwriting conventional mortgage loan applications involving multiple applicants. The average median credit score requires the underwriter to determine each applicant’s middle credit score, after which he or she will average all of these middle scores to ascertain the average median score.
Let’s consider the following example. An underwriter is required to manually underwrite a conventional mortgage loan application containing two applicants. The first applicant’s credit scores are 590, 612, and 655. The second applicant’s credit scores are 650, 710, and 744. By averaging both middle scores (612 and 710), the average median credit score that the underwriter must use in underwriting this loan is 661 (612 + 710 = 1,322. 1,322 / 2 = 661).
Under certain circumstances, credit developed in a foreign country may be used to underwrite a mortgage securing a United States property. Please review the Fannie Mae Selling Guide Sections B3-5.1-01, B3-5.2-0, and B3-5.4 for the specific guidelines surrounding foreign credit reports.
Mortgage loan originators must be able to set the appropriate expectations when counseling their customers without, of course, indicating to the customer the likelihood of his or her loan application’s approval. Although only underwriters are allowed to discuss the likelihood of approval, the MLO may certainly discuss program parameters and advise on the importance of solid credit.
Lastly, mortgage loan originators should be cautioned against writing off customers who may not currently qualify due to their credit. These future customers should be counseled as to what they can do to heal their credit and, once that has been accomplished, their gratitude will almost certainly drive them back to the loan originator who helped them recover to apply for that now-qualified-for loan. There is no such thing as an unqualified borrower. Just a currently-unqualified borrower. And this is something that smart and successful mortgage loan originators thoroughly understand.