10.7 CREDIT SCORES (03/09/16)

© RHS HB-1-3555 SFH Guaranteed Loan Program Technical Handbook

Using credit scores in underwriting. A credit score is a numeric representation of financial behavior, based on information found in a credit report. Credit scores are primarily based on five factors:

Payment history Amounts owed

Length of credit history New Credit, and, Types of credit used.

A lower score represents a higher credit risk, while a higher score indicates a lower credit risk.

Credit scores are an effective tool in evaluating an applicant’s credit reputation. As a quantitative measurement of risk, credit scores enable an underwriter to process mortgage applications more accurately and quickly, and with a greater degree of confidence. The use of credit scores speed up the approval process for an applicant who represents a low credit risk and allows the underwriter more time to analyze the creditworthiness of a higher-risk applicant. These scores objectively evaluate all the information in the applicant’s repository credit file at the time the credit score was created. A strong correlation between mortgage performance and credit scores has been identified. The use of credit scores in underwriting can reduce the risk of originating mortgages with unacceptable credit risk.

Accompanying reason codes with reported credit scores indicate why a credit score is not higher and can assist the lender in identifying credit factors that need to be addressed in determining the applicant has an acceptable credit reputation.

For manually underwritten loans or loans underwritten with the assistance of the Agency’s automated underwriting tool, GUS, the lender must satisfactorily establish the applicant’s willingness and ability to repay and manage obligations in accordance with 7 CFR 3555 and this Handbook.

Acceptable Credit Scores for Manually Underwritten Loans

Underwriting manually with validated credit scores. The lender must perform a detailed review of all aspects of the applicant’s credit history. Credit scores will be utilized to underwrite manually underwritten loans. Applicants with validated credit scores (See Section 10.5 of this Chapter) of 640 or greater meet the minimum credit reputation provided indicators of unacceptable credit, as addressed below, are not present in the applicant’s credit file. The presence of collections, charge-offs, judgments, disputed accounts, authorized user tradelines and payment shock in the credit analysis, as described in this Chapter, may require further evaluation and documentation by the lender.

Refer to Attachment 10-B and Section 10.8 for guidance when considering granting an exception for extenuating circumstances to the credit standards set forth in this Chapter.

Determining the credit score for manual underwriting.

If the applicant’s credit report has three scores, the middle score should be used as the representative score.

If the applicant has two scores, the lower of the two should be used as the representative score.

If the applicant has a repeating score, that score will be utilized.

If the applicant has one score, a NTMCR must be developed for manually underwritten loans. Each applicant must be evaluated separately.

Indicators of unacceptable credit. The following indicators require documentation meeting the criteria of Section 10.8 to approve an applicant’s loan request for manually underwritten loans:

Foreclosure within 3 years:

Including pre-foreclosure activity, such as a pre-foreclosure sale or short sale in the previous 3 years (refer to Attachment 10-B for additional guidance);

Bankruptcy within 3 years:

Chapter 7 bankruptcy discharged in the previous 3 years;

An elapsed period of less than 3 years, but not less than 12 months, may be acceptable if the applicant meets the criteria of Section 10.8 of this Chapter.

Chapter 13 bankruptcy that has yet to complete repayment (repayment plan in progress) or has completed payment in the most recent 12 months.

Plans that are completed for 12 months or greater do not require a credit exception in accordance with Section 10.8;

Late mortgage payments if any mortgage trade line during the most recent 12 months shows 1 or more late payments of greater than 30 days.

Late rent payments paid 30 or more days late within the last 12 months.

Lender actions when indicators of unacceptable credit are present on manually underwritten loans. When indicators of unacceptable credit are present and the lender proposes to approve a credit exception, the lender will refer to Section 10.8 of this Chapter to determine if an exception to credit can be granted. A lender is required to obtain documentation to support an approval of the loan request, based upon the criteria of Section 10.8. Documentation will be retained in a lenders permanent loan file.

Low credit score loan requests. A credit exception with supportive documentation confirming the circumstances leading to derogatory credit that attributed to the low credit score is required for all loans receiving a credit score of 639 or below. Circumstances must meet criteria, as outlined in Section 10.8 of this Chapter to be eligible for a credit exception. Loans with credit scores of 580 or below should not be approved.

Lender actions when inaccurate information is reported. Credit trade-lines that list the applicant as an “authorized user” cannot be considered in the underwriting decision unless another applicant in the mortgage transaction is the owner of the trade-line, or the owners of the trade-line is the spouse of an applicant, or the applicant can provide documented evidence that they have made the payments on the authorized user account for 12 months preceding application. Refer to Section 10.12 of this Chapter for further guidance.

Lender actions when collections are reported. Lenders will follow guidance in Section 10.9 when collections are reported on the credit report.

Lender actions when judgments are reported. Lenders will follow guidance in Section 10.10 when judgments are reported on the credit report. Applicants who have outstanding Federal judgments (other than IRS) that are open and unsatisfied are ineligible for the SFHGLP. Applicants who have an IRS tax debt are ineligible if a repayment plan is not underway. If a repayment plan is underway, the lender will determine if the repayment plan meets the criteria of a credit exception in accordance with Section 10.8 of this Chapter.

Lender actions when disputed accounts are reported. Lenders will follow guidance in Section 10.11 when an applicant has disputed tradeline references.

Obtaining rental history for manually underwritten loans. Lenders will follow Section 10.13 for guidance in obtaining rental history for manually underwritten loans. Loan requests with validated credit scores of 680 or greater are not subject to rental verification for manually underwritten loans.

Underwriting with no credit score. The use of non-traditional credit references as described in Section 10.6 of this handbook is acceptable if the applicant does not have a credit score, OR the credit score cannot be validated in accordance with Section 10.5 of this Chapter. If the required number of traditional or nontraditional tradelines cannot be documented, the loan is ineligible.

The lenders evaluation and conclusion that the credit reputation is acceptable . The lender’s underwriting decision to approve a mortgage must be based on an overall evaluation of the risks documented in the mortgage file. Underwriters must consider the entire credit profile of each applicant and not approve a loan based upon a single component. The lender may consider the strength of some components against the weakness of one component to arrive at a conclusion. The lender must document the evaluation in the lender’s permanent mortgage file. Whenever there is evidence of layered risk, more conservative underwriting standards must be utilized.

 Acceptable Credit Scores for Automated Underwriting

The Agency’s automated underwriting system will determine the applicable score when developing an underwriting recommendation and may utilize a single score. The credit score utilized by GUS represents the overall credit reputation risk for the loan transaction. Indicators of unacceptable credit, as described in Section 10.8A above are already considered in the risk evaluation considered by the automated underwriting system when rendering an underwriting recommendation. The underwriting score is located in the “Credit Report” section of the GUS Underwriting Findings Report.

Validating the credit score utilized by GUS. GUS credit scores are subject to validation to ensure a usable credit score is utilized for underwriting. This will ensure both the score is adequately indicative of an applicant’s credit reputation and fairness to the applicant in using credit scores to evaluate their overall credit reputation. Lenders will follow Section 10.5 of this Chapter to ensure the credit scores are usable in the underwriting analysis. GUS does not dynamically complete this step.

Downgrading an “Accept” Underwriting Recommendation. The lender may down grade the underwriting recommendation even when minimal requirements are met and an “Accept” underwriting recommendation is received, based upon their business rules and regulations, which may represent a more conservative approach.

The following represent examples when a lender will downgrade an “Accept” underwriting recommendation to a Refer and manually underwrite. A request for conditional commitment occurs in GUS when a lender performs a final submittal on the credit and underwriting page.

Unable to validate the credit score. The underwriting score located in the Credit Report section of the GUS Underwriting Findings Report cannot be validated. Non-traditional credit must be utilized to support the credit reputation of the applicants. Refer to Section 10.5 to validate credit scores.

Manually input liabilities. Accounts that have been manually input into the liabilities section of GUS and do not appear on the credit report have not had the opportunity to be considered in the credit evaluation by GUS. This will require an “Accept” underwriting recommendation to be downgraded to a “Refer.” Exceptions to the downgrade include manual entry of child support, alimony or garnishments from the applicant’s salary. Credit supplements obtained outside of GUS may not be used to verify debts to retain an “Accept” recommendation.

Disputed accounts. Disputed accounts as further outlined in Section 10.11 of this Chapter may require a manual down grade of an “Accept” underwriting recommendation.

Authorized user accounts. Tradelines that are authorized user accounts that do not meet the criteria as outlined in Section 10.12 of the Chapter may require a down grade of the an “Accept” underwriting recommendation.

Potential derogatory or contradictory information. If the lender is aware of any potential derogatory or contradictory information that is not any part of the data submitted to GUS or if there is any erroneous information in the data submitted to GUS. GUS will evaluate credit for significant credit indicators such as bankruptcy discharges, foreclosure sales, Deed-in-Lieu (DIL) of foreclosure and late mortgage payments. A lender must independently review information regarding the following:

Pre-foreclosure sale. A pre-foreclosure sale (short sale) transfer occurred within three years of the request for conditional commitment. Refer to Attachment 10-B for further guidance.