10.5 VALIDATING THE CREDIT SCORE TO ESTABLISH THE APPLICANT'S CREDIT REPUTATION (03/09/16)

Owned by Kacey Olson
Nov 17, 2018
3 min read

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

Credit scores are an integral part of the risk assessment. Credit scores are used to underwrite a borrower's credit reputation. Too little information, or information that is significantly inaccurate makes the credit score unusable for underwriting. A usable score ensures that the credit score is adequately indicative of an applicant's credit reputation and to ensure a fair evaluation to applicants in using credit scores to evaluate their overall credit reputation. If an applicant does not have a usable credit score in connection with their loan request, then the use of nontraditional credit references is acceptable.

For applicants with usable credit scores, the loan can continue to be underwritten with the automated underwriting system, subject to Section 10.7A of this Chapter. The automated underwriting system does not dynamically validate the credit score used for the underwriting recommendation. It remains the underwriter's responsibility. Applicants without usable credit scores will be manually underwritten to arrive at a conclusion that the applicant's credit reputation is acceptable.

A validated score does not wholly indicate that the applicant's credit reputation is acceptable. Even if the score exceeds the credit score as indicated in Section 10.7 of this Chapter, the credit score must be validated and the lender must determine that the applicants have satisfactorily established the willingness and ability to manage and repay obligations as agreed.

Once the credit reputation is established, the lender will evaluate the overall layering of risk in credit, capacity and collateral.

Validating the Credit Score. Two or more eligible tradelines are necessary to validate an applicant's credit report score. Eligible tradelines consist of credit accounts (revolving, installment etc.) with at least 12 months of repayment history reported on the credit report. At least one applicant whose income or assets are used for qualification must have a valid credit report score.

Confirm the applicant has at least two eligible tradelines reported to the credit bureau. The tradeline may be open, closed and/or paid in full by the applicant. Eligible tradelines include:

  • Loan (secured or unsecured);
  • Revolving (generally a credit which is not repaid by a certain number of installments);
  • Installment credit (generally repaid through a specified number of installments such as automobile, recreational vehicle, or student loans);
  • Credit card (offered by banking institutions, commercial enterprises and individual retail stores. Consumers make purchases on credit and if payment is made within a stipulated period of time, no interest is charged);
  • Collection (an account whereby an original creditor transfers an unpaid, delinquent balance to a collection agency to retrieve any monies owed);
  • Charge-off (is the declaration by a creditor that an amount of debt is unlikely to be collected)
  • Authorized user accounts may not be considered in the credit score and credit reputation analysis unless the applicant provides documentation that they have made payments on the account for the previous 12 months prior to application.

The following are not considered an eligible tradeline to validate the credit score:

  • Public records such as bankruptcies, tax liens, and judgments that appear on the credit report are not considered an extension of credit and therefore not included in this credit analysis step.
  • Disputed accounts are not considered in the credit score and are not considered an eligible tradeline to validate credit.
  • Deferred loans such as deferred student loans without 12 months of repayment history are not eligible tradelines to validate credit.

Insufficient information. A credit score can be generated if a repository's file includes only one tradeline, however, the lender must not use any score based on fewer than two tradelines. If the credit report cannot establish the required number of eligible tradelines to validate the credit score, establish a minimum payment history through use of a non-traditional report as explained in Paragraph 10.6 of this Chapter. Non-traditional credit may not be used to enhance poor payment records or low credit scores.

Validating GUS credit scores. Loans underwritten with the assistance of the Agency's automated underwriting system that receive an “Accept” recommendation are also subject to the credit score validation of this Paragraph. GUS applications receiving an “Accept” underwriting recommendation, that fail to meet the credit score validation test using a traditional credit report, must be downgraded to a “Refer” by the lender. In these instances the use of a non-traditional credit history will be required.