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MLO Training Bootcamp: Credit Scores and Report
Good afternoon, folks. Gustan asked me to explain about Credit, Credit Scores, Credit Payment History, and The Importance of Credit when you are originating a loan. Credit is, hands down, one of the most, if not the most important factor when you are qualifying and pre-approving a mortgage loan applicant. There is no uniform credit score and credit history that is set on getting approved for a mortgage. Every mortgage loan program has its own credit score guidelines and requirements, as well as specific credit requirements.
For example, let’s go over some case scenarios:
- HUD, the parent of FHA loans, requires a minimum of a 580-credit score for a borrower to qualify for a 3.5% down payment home purchase FHA loan.
- Borrowers with credit scores under 580 and down to 500 FICO are eligible to qualify and get approved for an FHA loan.
- However, per HUD guidelines, anyone with credit scores under 580 credit scores require a 10% down payment vs a 3.5% down payment. Fannie Mae and Freddie Mac require a 620-credit score for borrowers on conventional loans.
- The Department of Veterans Affairs has no minimum credit score requirements on VA loans.
- However, most lenders have lender overlays (WE WILL COVER LENDER OVERLAYS ON A SEPARATE MODULE ON MLO TRAINING e-Learning Module).
- Lender overlays are mortgage requirements set by individual lenders that is above and beyond the minimum agency mortgage guidelines of HUD, VA, USDA, Fannie Mae, and Freddie Mac.
- Non-QM loans, jumbo loans, and alternative lending options are portfolio loans, and the minimum credit score requirements is created and set by its individual lenders.
How Is Credit Pulled by Mortgage Lenders and How is the Qualifying Credit Score for a Mortgage Determined Credit Scores Determine the Following: All mortgage lenders of government-backed and conventional loans pulls a tri-merger credit report. A tri-merger credit report is when a credit reporting service such as Credit Plus, Advantage Credit, or CIC pulls a credit report from Equifax, Transunion, and Experian simultaneously. Each credit bureau has its own credit score for the mortgage loan applicant. The lender is required to use the middle credit score as the qualifying credit score. Tri-merger credit reports and its credit scores are good for 120 days from the date it was initially pulled. If the mortgage process lasts longer than 120 days, the mortgage loan originator is required to re-pull a new tri-merger credit report because the initial tri-merger credit report is null and void. There are times where MLOs will re-pull a tri-merger credit report before the 120 day expiration date during the mortgage process if the MLO is confident the borrower’s credit scores has gone up. The reason they do a hard-inquiry tri-merger repull is because the MLO is hoping for a higher credit score where it benetits the borrower with a lower rate. This is normally done before the loan officer locks the mortgage rate.
- Credit scores determine whether or not borrowers qualify for a mortgage loan program
- Credit scores determine pricing on mortgage rates
- Credit scores determine pricing on private mortgage insurance on conventional loans
Credit Reports Determine the Following:
- The borrower’s credit payment history is stated on credit reports (current, 30, 60, 90, 120 days late).
- Derogatory credit tradelines such as late payments, accounts in collections, account that has been charged off, repossession, and other derogatory credit payment history and status.
Public Records:
- Any public records will appear on credit reports.
Example of Public Records Include the Following:
- Type of bankruptcy, housing event (foreclosure, deed-in-lieu of foreclosure, short-sale, forbearance)
- Judgments
- Tax lien
- Other public records
National Third-Party Public Records Search
- All mortgage lenders does a national third-party public records search during the mortgage process.
- Any public records that is not reflected on the consumer credit reports needs to get disclosed by the mortgage loan applicant because it will get discovered.
- Not disclosing it to the MLO and/or lender can cause delays in the mortgage process or can cause a last-minute mortgage loan denial.
The borrower’s personal and personal information is posted on credit reports.
The mortgage loan applicant’s full name, legal name, AKAs, DOB, current and previous addresses, current and previous employers.
The mortgage loan applicant’s full name, legal name, AKAs, DOB, current and previous addresses, current and previous employers.
List of Credit Tradelines
- which are creditors and includes type of credit such as auto, mortgage, installment account or revolving account
- date opened, payment history
- date of last activity
- amount borrowed and loan
- credit limit, balance
- late payment history, current standing
Credit Disputes on Derogatory Credit Tradelines
You will also find derogatory credit tradelines that is being dispute with the verbiage consumer disputes this credit tradeline. Credit disputes are not allowed on the following types of credit tradelines:
- Derogatory credit tradelines such as late payments
- Non-medical collection accounts
- Charged-off accounts
- Public records such as bankruptcy, foreclosure, deed-in-lieu of foreclosure, and short-sale
- Judgments
- Tax-liens
Credit Disputes are Allowed on the Following Types of Credit Tradelines
- Medical collection accounts
- The sum of all non-medical collection accounts with the aggregate outstanding balance that is less than $1,000 dollars.
- Non-medical collection accounts with zero balance, which means the non-medical collection account has been paid off.
- Non-medical collection accounts and credit tradelines has seasoned longer than 24 months (Be careful on this exemption and check with the underwriter of the wholesale lender because many lenders will still require you remove all credit disputes.
Why Credit Disputes Are Not Allowed By Mortgage Lenders
The main reason why credit disputes are not allowed during the mortgage process is because of the following:
- Whenever a consumer initiates a credit dispute on a derogatory credit tradelines, the algorithm on the credit scoring system of Experian, Equifax, and Transunion automatically discounts the disputed credit tradeline from its credit scoring model.
- What this means is that each of the three credit bureaus will discount and NOT count the derogatory credit tradeline from the consumer’s credit scores.
- Since the derogatory credit tradeline is not counted on the overall consumer credit score, the consumer credit scores will increase.
- Every credit dispute on derogatory credit tradelines will trigger a higher credit score.
- Therefore, under the lender’s point of view, a credit report with credit disputes renders an inaccurate credit score.
- On the flipside, if you do a credit dispute on medical collections and/or exempt credit tradelines, you can increase your credit scores and get away with it.
Bi-Merge vs. Tri-Merge Credit Report – Advantage Credit
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Bi-Merge vs. Tri-Merge Credit Report – Advantage Credit
Bi-Merge vs. Tri-Merge Credit Report – Advantage Credit
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MLO Training Bootcamp: Understanding Credit Scores and Mortgage Credit Reports
Why Every Mortgage Loan Originator Must Understand Credit Scores and Credit Reports
Understanding credit scores and mortgage credit reports is essential for every mortgage loan originator. Credit scores influence a borrower’s ability to get a mortgage, the interest rate offered, discount points, mortgage insurance, automated underwriting results, and available loan types.
A credit score by itself does not tell the whole story about a borrower’s ability to get a mortgage. Two people with the same score might have very different credit histories, debts, mortgage payment records, and results when they apply.
For example, a borrower with a 580 credit score may have stable employment, sufficient income, and established credit but experienced financial hardship several years ago. Another borrower with a 680 credit score may have recent late payments on a mortgage, substantial revolving debt, and unresolved credit disputes.
Minimum Credit Score Requirements for a Mortgage Loan Approval
In some cases, a borrower with a lower credit score may actually qualify more easily for certain mortgage programs.
At Gustan Cho Associates, we train mortgage loan originators to look at the entire credit profile, not just the credit score. Our program covers how mortgage credit reports work, how to find qualifying scores, how to identify underwriting issues, and how to review FHA, VA, USDA, conventional, and non-QM loan options.
Module 1: What Is a Mortgage Credit Report?
A mortgage credit report contains information about a consumer’s borrowing history, repayment behavior, outstanding credit obligations, and reported derogatory credit events.
Mortgage companies use credit reports to evaluate creditworthiness, verify financial obligations, and determine whether borrowers satisfy mortgage program requirements.
Most mortgage applications rely on credit information obtained from the three nationwide consumer credit reporting agencies: Equifax, Experian, and TransUnion. A merged mortgage credit report ordinarily contains information from all three agencies. It may include mortgage credit scores, outstanding loans, credit cards, payment histories, collections, charge-offs, certain public records, and recent credit inquiries.
Mortgage Credit Report
A mortgage credit report may also reveal financial obligations that a borrower forgot to disclose on the mortgage application.
For example, a borrower may report having a $450 automobile payment but fail to disclose a personal loan requiring another $300 per month. The additional obligation can affect the borrower’s debt-to-income ratio and mortgage eligibility.
An experienced MLO should carefully review credit reports before recommending financing options.
Consumer Credit Scores Versus Mortgage Credit Scores
One of the most common misunderstandings among homebuyers involves differences between consumer credit scores and mortgage credit scores. Borrowers frequently monitor their scores through Credit Karma, their banks, or credit card companies. Those scores may differ substantially from the scores used by mortgage companies.
Different credit scoring systems use various formulas to review credit information. Scores can also differ because creditors send updates to each credit bureau at different times.
Historically, mortgage underwriting has relied extensively on Classic FICO mortgage scoring models. The industry has also been transitioning toward additional approved scoring models, including VantageScore 4.0 and FICO Score 10T, subject to agency implementation schedules and lender adoption. Mortgage loan originators must verify which scoring model and credit reporting requirements apply to the specific mortgage program and lender.
Important: Never guarantee mortgage approval based only on a credit score from a consumer credit monitoring app.
Module 2: Understanding How Credit Scores Are Calculated
Traditional FICO credit scores are affected by several major factors, including payment history, amounts owed, length of credit history, new credit, and credit mix. These factors may have different effects depending on the scoring model and the person’s credit, but understanding them helps MLOs explain credit issues to borrowers.
Payment History
Payment history is one of the most influential components of traditional FICO scoring. Credit scoring systems evaluate whether consumers make payments as agreed. Recent late payments, repeated delinquencies, collections, and charge-offs may negatively affect credit scores. Not all late payments affect underwriting in the same way.
For example, a borrower who experienced one late credit card payment three years ago may be evaluated differently from a borrower who recently became 60 days delinquent on a mortgage. Mortgage payment history deserves special attention because the borrower is applying for another housing-related financial obligation.
Amounts Owed and Credit Utilization
Credit utilization is the percentage of available revolving credit currently being used. Assume a borrower has a credit card with a $10,000 credit limit and a reported balance of $9,000. The borrower’s credit utilization on that account is 90%. If the balance decreases to $2,000 while the limit remains unchanged, utilization falls to 20%. Paying down high credit card balances can help improve credit scores, but the amount of improvement is not guaranteed. MLOs should also consider aggregate expenditure across multiple revolving accounts and whether individual accounts are reporting balances close to their limits.
Length of Credit History
Credit scoring models consider the age of credit accounts and the overall history of established borrowing. Long-standing accounts with satisfactory payment histories can add positively to a borrower’s credit profile.
Closing old credit cards can reduce available credit and affect credit utilization. Borrowers should avoid closing long-standing accounts just to try to raise their credit scores.
New Credit and Credit Inquiries
Opening multiple new credit accounts can affect credit scores and create additional monthly financial obligations.
People getting ready to buy or refinance a home should avoid applying for new credit, taking out car loans, or making big purchases on credit if possible. An MLO should explain how newly acquired liabilities may affect mortgage approval, even when the borrower continues to make payments on time.
Credit Mix
Credit scoring systems also consider the types of credit accounts a consumer maintains.
A borrower may have revolving credit cards, installment loans, and mortgage accounts.
However, borrowers should not take on new debt just to create a certain mix of credit accounts.
Module 3: How Mortgage Companies Determine Qualifying Credit Scores
Mortgage loan originators must understand how representative credit scores are selected and how different mortgage programs use those scores.
Determining the Middle Credit Score
Assume a borrower has the following mortgage credit scores. Equifax reports 641. Experian reports 672. TransUnion reports 658. The scores are arranged from lowest to highest: 641, 658, and 672.
The middle credit score is 658.
Under the traditional three-score representative method, the borrower’s representative score is 658, not the average of the three scores. When only two eligible credit scores are available, the lower score is generally used, subject to applicable representative-score requirements.
Multiple Borrowers Applying for One Mortgage
Now assume a husband and wife apply jointly for a mortgage.
- The husband’s scores are 620, 650, and 680. His middle score is 650.
- The wife’s scores are 590, 605, and 635. Her middle score is 605.
- Under the traditional lower-of-the-borrowers’ representative-score method, the loan-level representative score is 605.
- MLOs should be aware that the score used to decide if someone qualifies may not be the same score used to set the mortgage rate.
- For example, certain manually underwritten conventional loans use the median credit score for eligibility, while pricing may still use the lower representative score.
- The MLO must follow the specific requirements of the selected agency, underwriting method, and mortgage investor.
Module 4: Minimum Credit Score Requirements by Mortgage Program
Different mortgage programs evaluate credit scores differently. A borrower who does not qualify for one program may qualify under another.
FHA Mortgage Credit Score Requirements
FHA generally permits mortgage financing for borrowers with decision credit scores as low as 500, subject to applicable requirements.
- Borrowers with scores of 580 or higher may qualify for FHA maximum financing with a minimum required investment of 3.5%.
- Borrowers with scores between 500 and 579 generally require a minimum down payment of 10%.
- A borrower with a 550 credit score is not automatically approved, even if FHA allows loans at that score.
- The lender must evaluate the borrower’s credit history, debt-to-income ratio, employment, qualifying income, housing payment history, and applicable underwriting requirements.
- Some wholesale lenders impose credit score restrictions beyond FHA’s minimum standards.
VA Mortgage Credit Score Requirements
The Department of Veterans Affairs does not establish a universal minimum credit score requirement. VA mortgage qualification considers the borrower’s overall creditworthiness, payment history, income, debts, and residual income.
A veteran with a 560 credit score may qualify if the complete file meets VA requirements and an eligible lender approves the loan.
Residual income is especially important in VA underwriting because it measures the income remaining after monthly obligations and living expenses are accounted for. An MLO should not assume a veteran is ineligible only because their credit score is below 620.
Fannie Mae and Freddie Mac Mortgage Credit Score Requirements
Conventional mortgage underwriting requires an understanding of the difference between automated and manual underwriting. Fannie Mae Desktop Underwriter does not impose a universal minimum credit score on every DU case file, although other eligibility requirements remain applicable. Manually underwritten conventional mortgages have separate credit score requirements.
Freddie Mac Loan Product Advisor also applies its own eligibility and risk assessment requirements. Some mortgage lenders and investors establish additional minimum-score requirements.
MLOs should review current agency guidelines, automated underwriting findings, mortgage insurance requirements, and the selected lender’s eligibility rules before making a qualification determination.
USDA Mortgage Credit Requirements
USDA mortgage programs evaluate creditworthiness, income eligibility, repayment ability, and other program requirements.
Credit scores may influence automated underwriting findings and paperwork requirements.
Borrowers with lower scores may require additional credit analysis, depending on the underwriting pathway and lender requirements.
USDA qualification also includes income and property eligibility restrictions that must be evaluated separately from the credit score.
Non-QM Mortgage Credit Requirements
Nonqualified mortgage programs may offer financing alternatives for borrowers who cannot meet standard agency requirements. Non-QM products include bank statement loans, debt service coverage ratio mortgages, asset depletion programs, and certain financing options following bankruptcy or foreclosure.
Credit score requirements vary among non-QM investors. Lower scores may result in higher down payments, additional reserves, or less advantageous pricing.
MLOs should not assume that every non-QM lender uses the same eligibility rules. A professional mortgage loan originator must know how to interpret individual credit tradelines and identify underwriting concerns.
Verify Borrower Identification
Commence by reviewing the borrower’s identifying information. Confirm that the report belongs to the correct borrower and investigate any indication of mixed credit files or inaccurate identifying information. A similar name does not always mean the account belongs to the applicant.
Review Open Credit Accounts
Examine every reported mortgage, automobile loan, personal loan, student loan, credit card, and other credit obligation.
The MLO should identify the creditor, current balance, monthly payment, account status, and payment history. These details are essential when calculating the borrower’s debt-to-income ratio.
Understand Credit Payment History
Credit reports frequently display payment history through numerical or abbreviated codes. A current account is generally reported as paid in accordance with the terms.
A 30-day late payment indicates a reported delinquency of approximately 30 days, while 60-day and 90-day late payments reflect increasingly serious delinquencies.
Reporting formats and codes can differ by credit vendor, so MLOs should check the report’s legend. The timing, severity, and frequency of late payments can substantially affect mortgage qualification.
Review Collections and Charge-Offs
Collection accounts and charge-offs call for careful evaluation. The MLO must determine whether the debt is medical or nonmedical, whether the account remains outstanding, whether repayment arrangements exist, and whether the account affects the selected mortgage program. Not all outstanding collections must be paid before getting a mortgage.
A recent credit inquiry may indicate that the borrower applied for additional financing. An automobile financing inquiry, for example, may reveal a newly acquired car loan that has not yet appeared as an active tradeline. MLOs should investigate potential undisclosed liabilities before submitting the loan for underwriting.
Module 6: Understanding Collections, Charge-Offs, and Derogatory Credit
Collections and charge-offs are common reasons borrowers believe they cannot qualify for a mortgage. However, mortgage guidelines do not universally require all outstanding collections and non-mortgage charge-offs to be paid.
FHA Treatment of Collections
FHA distinguishes medical collections from certain nonmedical collections. Depending on outstanding balances and other circumstances, nonmedical collection accounts may require additional payment calculations, supporting documentation, or other underwriting analysis.
Outstanding charge-offs and significant derogatory credit may require explanations and supporting documentation, notably under manual underwriting. MLOs must distinguish between debts included in DTI and derogatory credit events evaluated as part of overall creditworthiness.
Conventional Treatment of Collections
Under certain Fannie Mae Desktop Underwriter requirements, outstanding non-mortgage collections and charge-offs on a one-unit primary residence generally do not have to be paid solely because they remain outstanding. Different requirements apply to other property types and underwriting circumstances. Delinquent accounts that have not become collections can also be treated differently.
VA Treatment of Collections
VA lenders evaluate collections in the context of the borrower’s complete credit profile.
Medical collections, nonmedical collections, judgments, and other derogatory obligations may receive different treatment.
The lender must determine whether unpaid obligations affect repayment ability, creditworthiness, or closing requirements.
Why MLOs Should Not Automatically Recommend Paying Collections
Paying off a collection account does not always increase your credit score.o pay old collections can leave less available for your down payment, closing costs, or reserves. Before advising borrowers to pay off outstanding debt, the MLO should evaluate the mortgage program, underwriting requirements, documented funds, possible effect on scores, and any applicable legal concerns.
Module 7: Bankruptcy, Foreclosure, and Major Credit Events
Bankruptcy and foreclosure do not necessarily eliminate a borrower’s ability to qualify for mortgage financing.
Eligibility relies on the mortgage program, the type of credit event, relevant dates, and the borrower’s financial recovery.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy usually involves a discharge of eligible debts. Mortgage programs establish different waiting periods following bankruptcy.
The MLO should obtain the bankruptcy discharge date, review the borrower’s reestablished credit, and determine whether the borrower satisfies the applicable program requirements.
Chapter 13 Bankruptcy
Certain FHA and VA mortgage programs may permit financing during an active Chapter 13 bankruptcy repayment plan.
Eligibility generally requires a satisfactory history of plan payments for at least 12 months, and all required court or trustee authorization.
Manual underwriting and other applicable requirements must also be satisfied. FHA and VA may provide options following Chapter 13 discharge that differ significantly from conventional mortgage waiting periods.
Foreclosure and Short Sale
MLOs must identify the exact nature of a prior housing-related credit event. A foreclosure completion date, short-sale closing date, deed-in-lieu completion date, and bankruptcy discharge date are not interchangeable. The applicable event and date can determine the earliest possible eligibility for a new mortgage.
Recent Mortgage Late Payments
Recent mortgage delinquencies can pose notable underwriting concerns even when the borrower’s overall credit score remains relatively high.
The MLO should evaluate how recently the late payments occurred, their severity, whether the account is now current, and the requirements of the selected mortgage program.
Module 8: How Credit Scores Affect Mortgage Interest Rates and Discount Points
Credit scores can have a significant impact on mortgage pricing. Two borrowers purchasing comparable homes with similar loan amounts and down payments may receive different interest rates or discount-point requirements because their credit profiles differ. However, credit score is not the only factor affecting mortgage pricing.
Loan-to-value ratio, occupancy, property type, loan purpose, mortgage insurance, debt-to-income ratio, and current market conditions may all determine pricing.
Consider a borrower with a 760 representative credit score and another borrower with a 640 score. The borrower with the stronger credit score may qualify for more preferable pricing, depending on the mortgage program and other factors.
MLOs should not quote exact interest rate differences without checking the latest lender pricing.
A Discount Point Typically Equals 1% of the Loan Amount
For example, one discount point on a $300,000 mortgage equals $3,000. Paying discount points may reduce the interest rate, but the actual rate reduction varies with lender pricing and lending conditions.
Mortgage loan originators should explain how interest rates, discount points, closing costs, monthly payments, and the borrower’s expected ownership period are connected.
Module 9: Rapid Rescores and Credit Improvement Strategies
Some borrowers are close to a credit score threshold that could affect their mortgage eligibility or interest rates. A rapid rescore may help when verified changes to credit information have not yet been reflected in the borrower’s mortgage credit report.
A rapid rescore is an expedited credit-reporting update process coordinated through an eligible credit reporting vendor. It does not promise a specific increase in score.
For example, a borrower may have paid a credit card balance from $8,000 to $1,000, but the credit report still reflects the original balance. If acceptable creditor documentation is available, the credit vendor may determine whether an expedited update is possible.
Responsible Credit Improvement Strategies
MLOs should help borrowers understand how credit utilization, inaccurate reporting, outstanding obligations, and recent late payments can affect mortgage qualification. Reducing high revolving balances may improve a borrower’s profile, but the financial impact should be evaluated before the borrower makes payments.
Correcting inaccurate credit information can also be important. Borrowers should avoid unnecessary credit applications, large financed purchases, and other major financial changes during the mortgage process. MLOs should not guarantee that scores will increase or advise borrowers to dispute accurate information just to qualify for a mortgage.
Module 10: Hard Credit Pulls, Soft Credit Pulls, and Mortgage Shopping
Mortgage loan originators should understand the difference between hard and soft credit inquiries. A hard credit inquiry generally occurs when a lender accesses a consumer’s credit report in connection with a credit application.
Hard Inquiries May Affect Credit Scores
A soft inquiry generally does not affect the consumer’s score. Some mortgage companies offer preliminary credit reviews using eligible soft-pull products. However, a soft credit report may not satisfy the requirements for a complete mortgage underwriting file.
Credit scoring models generally provide special treatment for multiple qualifying mortgage inquiries during a designated rate-shopping window.
The applicable window depends on the scoring model and may range from approximately 14 to 45 days. MLOs should clearly explain these protections but should not promise that credit inquiries will never affect a consumer’s score.
Module 11: Real-World Mortgage Credit Case Scenarios
Understanding mortgage guidelines becomes easier when MLOs apply them to realistic borrower situations.
Case Scenario 1: FHA Borrower With a 559 Credit Score
A borrower wants to purchase a $250,000 home. The applicant has a 559 representative mortgage credit score, established employment, sufficient income, and several old collection accounts. The borrower has been told by another mortgage company that approval requires a minimum credit score of 620.
An experienced MLO should first determine whether the borrower meets FHA financing requirements, even if the borrower has a score below 580.
The MLO should review the required down payment, credit history, collection accounts, housing payment history, and eligibility under manual underwriting. The next step is to identify an eligible lender that accepts the applicable credit profile.
A score below 620 does not automatically eliminate all FHA financing possibilities.
Case Scenario 2: VA Borrower With a 580 Credit Score
A veteran has a 580 representative credit score, stable employment, sufficient qualifying income, and satisfactory recent housing payment history. The veteran’s credit report contains several older derogatory accounts related to financial hardship.
The MLO should review the nature and dates of those accounts, calculate the debt-to-income ratio, and evaluate VA residual income requirements.
The borrower may be eligible for a VA mortgage despite the relatively low credit score, subject to underwriting and lender requirements.
Case Scenario 3: Conventional Borrower With a 680 Credit Score and Recent Mortgage Delinquency
A borrower has a 680 representative credit score but experienced a 60-day late payment on a mortgage eight months earlier. Although the score may appear acceptable, the recent mortgage delinquency can create a significant underwriting issue.
The MLO should verify the accuracy of the reporting, determine whether the mortgage is current, and evaluate the applicable conventional underwriting rules.
Automated underwriting findings and program-specific restrictions may prevent approval despite the borrower’s 680 score.
This example shows that checking payment history is just as important as looking at the credit score.
Case Scenario 4: Borrower With High Revolving Credit Balances
A borrower has a 625 representative score and three credit cards reporting high utilization. The applicant has $15,000 in savings but needs approximately $11,000 for the down payment and closing costs.
Paying off every credit card could leave insufficient funds to complete the purchase. The MLO should review current program eligibility and determine whether a targeted reduction in revolving debt could improve qualification while preserving necessary funds. It is often better to have a clear, well-documented plan than to pay off all accounts without a strategy.
Module 12: MLO Credit Report Review Checklist
Before issuing a mortgage preapproval, an MLO should thoroughly review the borrower’s credit report.
- Begin by verifying the applicant’s identity and examining the reported mortgage scores.
- Determine the appropriate representative credit score and verify how the selected mortgage program evaluates that score.
- Review all outstanding mortgages, automobile loans, student loans, personal loans, revolving credit accounts, and other reportable or disclosed obligations.
- Pay particular attention to recent housing payment history and significant delinquencies.
- Evaluate collections, charge-offs, bankruptcy filings, foreclosure records, and judgments when applicable.
- Investigate disputed accounts, potentially inaccurate reporting, and recent credit inquiries that may reveal additional liabilities.
- Compare the credit report against the borrower’s mortgage application to identify discrepancies.
- After completing the review, determine which mortgage programs may be available and whether automated or manual underwriting is appropriate.
The MLO should also verify applicable lender overlays, required down payment, closing costs, reserves, and other eligibility requirements. Doing a full credit review can help prevent underwriting delays and help the loan officer set realistic expectations for the borrower.
Module 13: MLO Credit Report Training Assessment
Loan originators completing this bootcamp should be able to answer the following questions.
Question 1:A borrower has mortgage credit scores of 610, 650, and 690. What is the middle score?
The correct answer is 650 because the representative middle score is the median of the three reported scores.
Question 2: Does the VA Establish a Universal Minimum Credit Score?
No. The VA does not establish a universal minimum score. However, individual lenders may have additional requirements.
Question 3:A Borrower Has a $10,000 Credit Card Limit and an $8,000 Balance. What is the Credit Utilization?
The utilization is 80%, calculated by dividing the outstanding balance by the credit limit.
Question 4: Must Borrowers Always Pay Outstanding Non-Mortgage Collections Before Obtaining a Mortgage?
No. Requirements vary depending on the mortgage program, property type, underwriting method, and the account’s circumstances.
Question 5:Can a Rapid Rescore Guarantee a 30-Point Credit Score Increase?
No. A rapid rescore may update eligible information more quickly, but the resulting credit score is determined by the applicable scoring model.
Question 6:Can a Borrower Qualify for a Mortgage with a 550 Credit Score?
Potentially. FHA permits certain loans with scores between 500 and 579, subject to additional requirements. VA and some non-QM products may also offer options depending on the borrower’s overall circumstances and the lender’s availability.
Frequently Asked Questions About Mortgage Credit Scores and Reports
Can a borrower qualify for a mortgage with a credit score below 580?
Yes, in some circumstances. FHA permits financing with scores as low as 500 under specified requirements. VA does not establish a universal minimum credit score, and some non-QM programs may also accept lower scores. Actual approval depends on the complete file and selected lender.
Why is a Mortgage Credit Score Different from a Credit Karma Score?
Mortgage companies and consumer monitoring services may use different credit scoring models and reporting information. As a result, the scores may differ even when they are based on similar credit histories.
Does Paying Off a Collection Account Automatically Improve a Credit Score?
No. The impact depends on the credit scoring model, the account’s characteristics, and the borrower’s overall credit profile. Paying a collection also does not automatically remove it from the credit report.
Can a Borrower Qualify for a Mortgage Without a Traditional Credit Score?
Potentially. Certain mortgage programs permit qualifying borrowers to use nontraditional credit documentation, such as verified rental or utility payment histories, subject to program-specific requirements.
Do Mortgage Credit Inquiries Lower Credit Scores?
Hard inquiries may affect scores, while soft inquiries generally do not. Multiple qualifying mortgage inquiries during an applicable rate-shopping window may receive special scoring treatment.
Can a Borrower Dispute Inaccurate Information During the Mortgage Process?
Yes. Consumers have the right to dispute inaccurate credit information. However, unresolved disputes can affect mortgage underwriting, and the MLO should review the applicable program requirements before recommending any action.
Should Every Borrower Improve Their Credit Score Before Applying for a Mortgage?
No. Some borrowers already qualify for appropriate financing. Credit improvement should be considered when it may meaningfully affect eligibility, mortgage pricing, or overall financial readiness.
Final Thoughts: Why Mortgage Loan Originators Must Master Credit Reports
A good mortgage loan originator understands that qualifying for a mortgage involves more than just looking at a credit score. Each credit report reveals a borrower’s debts, payment history, past challenges, and credit management. MLOs who can read and interpret this information are better equipped to spot issues, recommend the right loan programs, and guide borrowers through the process.
At Gustan Cho Associates, our mortgage credit training teaches loan originators about agency guidelines, how to identify manual underwriting opportunities, and how to assess the full financial picture for each borrower.
The goal is to build an accurate credit profile early, spot any issues that require attention or additional paperwork, and choose a loan strategy that fits the borrower’s actual situation. A skilled MLO does not just look for perfect credit scores; they know how to help borrowers with less-than-perfect credit find a way to buy a home.
Training Compliance Note:
Mortgage agency guidelines, credit scoring model implementation, automated underwriting requirements, and lender overlays may change. Before applying these lessons to an active loan, verify the current FHA Handbook 4000.1, VA Lenders Handbook, Fannie Mae Selling Guide, Freddie Mac Seller/Servicer Guide, USDA guidelines, and applicable investor requirements.
Resource: https://www.hud.gov/hudclips/handbooks/housing
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This reply was modified 1 week, 6 days ago by
Sapna Sharma.
hud.gov
Housing Handbooks | HUD.gov / U.S. Department of Housing and Urban Development (HUD)
Housing HandbooksAccess Housing Handbooks superseded in full by Single Family Housing Policy Handbook 4000.1 (SF Handbook)
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