June 5, 2024 • 33 mins
Unlock the full potential of your loan origination skills with our latest episode of "Loan Officer Training." This week, we're diving into the fundamentals of credit report review, focusing on how to properly analyze credit reports for credit simulation opportunities. Whether you're a seasoned professional or just starting out, this episode is packed with invaluable insights to help you make the most of every credit report you encounter.
Join our expert host as we explore the critical components of a credit report and how to interpret them effectively. Learn the importance of understanding credit scores, payment history, and debt-to-income ratios to provide your clients with the best possible advice. We’ll break down complex credit data into manageable segments, making it easier for you to identify key areas for improvement.
Discover how to spot opportunities for credit simulation, a powerful tool that can help clients see the potential impact of different financial actions on their credit scores. From paying down debt to correcting errors, we'll guide you through various simulation scenarios that can lead to significant credit score improvements.
Tune in to gain a deeper understanding of credit report review fundamentals and how to leverage credit simulation opportunities. This episode is your key to becoming a more effective and trusted loan officer, capable of guiding your clients towards financial success with confidence and precision.
Don’t miss out on this essential training session designed to elevate your expertise and enhance your client relationships!
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Restream recording Jun 05, 2 (00:00):
So welcome everyone.
My name is Kyle Hiersche.
I'm the COO of the mortgagecalculator joined here by our
president at Hiersche and oursales manager, Jose Gonzalez.
We are a lender that specializesin non QM loans and what we do
every Tuesday, Wednesday, andThursday evening at 7 PM Eastern
on the show is go through a newloan officer training topic.
And tonight we're going to talkabout credit reports and credit
(00:20):
simulation.
So I will let the master Josetake over here.
Good evening, everybody.
Thank you for joining us fortonight's training on credit
report review fundamentals,right?
We want to train you so that youknow how to identify different
(00:41):
issues and opportunities in thecredit report, especially credit
simulation opportunities, whichcould make or or break your
deal, right?
How many times has, has a creditsimulation not been attempted
and then all of a sudden you'retwo points short from the next
level because something justhappened with your loan,
(01:01):
guidelines changed, whatever mayhave happened, and now all of a
sudden you're in limbo.
So we always want to beproactive in reviewing the
credit report and identifyingany opportunities that the
borrower may have.
To increase their credit score,which may also allow them to
increase their LTV and decreasethe interest rate and the cost
(01:24):
or the cost on the rate, right?
So let's get right into it now.
Um, it's ironic because today,uh, So, I was questioned by some
MLOs about if we had any creditreport repair company that we
can recommend.
(01:45):
Uh, we don't usually like to dothat.
What we do like to do is be loanconsultants and understand what
may be causing the issues.
To the borrower's credit so thatwe can properly explain it to
the borrower and so that theycan take the necessary action.
Usually that's all that isneeded to assist the borrower
(02:08):
with their credit report andtheir credit scores.
So let's give, uh, let's get alittle history on credit
reports.
Uh, when did they actually comeabout?
Well, the, the attempts tostandardize the credit reporting
process dates back to 1841 whenthe Mercantile Agency was
(02:32):
founded.
That was the first attempt, uh,at quantifying the data.
Now, the first standardizedcredit score, the FICO score was
introduced in 1989.
Seems like it's been around alot longer than that, but prior
to 1989.
We didn't really have FICOscores, credit scores, so
(02:54):
Equifax and TransUnion followedsoon thereafter.
So that was Experian that cameout with the FICO score.
Now, what did, um, this creditscoring system allow?
Well, it eliminated subjectivereview.
Of borrower credit, right?
(03:15):
It's very important that we lookat borrower credit in an
objective point of view.
So they they form the creditscore model, which we're going
to discuss in the next slide asto how that model analyzes to
credit.
Having These, uh, creditscoring, uh, models and credit
(03:38):
reports also sped up the loanapproval process and increased
origination output, right?
That's good stuff for us.
MLOs, right?
We're talking about addingsystems here.
It allowed automation, scaling,and increased profit.
And as if you all would knowalready, Equifax, Experian, and
(04:01):
TransUnion are the three creditbureaus used.
But what you need to understandis that each credit bureau has
their own algorithm to interpretthe data.
So the, and I'm sure you, that'swhy the, the scores are
different in all three bureaus.
(04:21):
Uh.
And I'm sure you've seen thisbefore where, like, one account
may not report to one bureau, itreports to another bureau, uh,
so, or they could only have oneaccount and the three bureaus
report three different scoresbecause they analyze the data
differently.
(04:43):
So, uh, what are the scoreranges, right?
And how can it impact our loan,our loan origination?
Well, anything 750 or above, youcan consider that excellent.
Best pricing and loan to valueon all of our products,
especially non QM products, isavailable with a 740 plus credit
(05:07):
score.
700 to 749 is considered good,still many loan options.
However, below 700, uh, we havea lot of options that get cut
off.
So it seems like 700 is a verycritical number.
650 to 699 is going to be fair,considered fair credit.
(05:31):
Be aware that 660 660 is acutoff for many non QM options.
So you'll see below 660, uh,LTVs drop drastically for a lot
of non QM options like our bankstatement loans and our DSCR
loans.
For example, 600 to 649 would beconsidered poor credit, uh,
(05:57):
Conventional minimum FICO scoreis 620 per the matrix, even
though, you know, it's going totell you minimum FICO determined
by AUS, and then you got toworry about mortgage insurance.
Non QM options are going to beavailable between the 600 and
the 649, but they're going to belimited and at reduced LTVs.
(06:18):
And below 600, that's my Youknow, you could pretty much
consider that bad credit.
Now there are still options, butfor example, FHA automated
underwriting will require an LTVat 90 percent or below.
Uh, when, at 90%, when the, um,FICO is 580 or below, you're
(06:39):
also below 600, you're going tohave limited VA and USDA options
and very limited non QM options.
We do have.
Uh, options on non QM down to a575 credit score or DSCR
options, for example, go up to a65 percent LTV down to, uh, at a
(07:00):
575 credit score.
So these are your credit scoreranges.
Now, what are now again, nowwe're getting into here is.
The parts of the lesson that'sgoing to allow you to be the
consultant to understand why,when you're reviewing the credit
(07:20):
report, why are certain, youknow, what, why is the score
reflecting what it's reflecting?
So you got to understand thenthe following components that
make up the credit scoringmodels.
Payment history makes up 35%.
Of the score payment history isaffected by late payments, uh,
(07:45):
credit utilization, the, um, thepercentage of their credit that
they're using, right.
Which is basically availablecredit, which is your total
limit versus utilization, whichis the amount being used.
Uh, so high balance to limitratio is going to affect your
(08:06):
credit utilization.
In other words, if the balanceis.
900 and the limit's 1, 000,you're at 90%.
That's a very high utilizationratio.
The length of credit history is15 percent of the scoring model,
and that is affected by the ageof the accounts.
(08:30):
Reason being, uh, thoseaccounts, the longer that
they've been around, the morepayment history that you can
review.
Right.
So it adds more weight to, youknow, the longer they've been
making payments.
So the length of history is 15percent credit mix, right?
(08:50):
The, so it's 10 percent of thetotal and credit mix is affected
by the types.
of accounts in use, right?
Depending is it installmentaccounts or which are secured or
are they revolving accounts,which are unsecured.
And then new or recent creditaccounts makes up 10 percent of
(09:15):
the scoring model.
This is affected by newaccounts, which have a limited
payment history.
So, If you got some newaccounts, you're going to see a
drop in the credit for at leastthree, four, five, six months
until there is enough of apayment history established so
that, uh, the score can go backup.
(09:37):
So again, payment history, 35%,credit utilization, 30, length
of credit history, 15 creditmix, 10 percent new and recent
credit, 10 percent of theaction.
So now once we are reviewing thecredit report, we have to review
(09:59):
it for, uh, accuracy.
So you want to review the datafor accuracy and for alerts.
The system itself will give youdifferent alerts.
So you want to, you want toensure that the bar information
is correct, uh, becauseincorrect information on a
(10:19):
credit report, and I'm not justreferring to the social security
number, because that's anobvious, but I'm talking about
things like date of birth.
Where they live, their residenceaddress there, if they use their
complete name, including middlename or middle initial, um,
these are different.
(10:39):
These are different items thatif they are misspelled, if the
data is different.
It may not pick up the completeborrower credit file.
So you want to make sure thatyou have their correct address,
correct date of birth, obviouslycorrect social security number,
correct spelling of their name,all of those things.
(11:00):
And if they've lived at a prioraddress system will sometimes
ask you, you know, prior addressto this one, put that one in
too, because that credit may becoming up under that prior
address as well.
So remember any, Errors in thisdata could skew the information
you receive in your report.
(11:20):
Now you want to review thereport for red flags and alerts
like again, easy ones, socialsecurity number mismatch or
issue date, not just forpurposes of, uh, accuracy of the
data, but, you know, just to seeif there could be any, anything
going on.
Uh, like, uh, it's not reallythe borrower's information, you
(11:44):
know.
So again, social security numbermismatch issue date would mean
that that social security wasissued within the last 10 years,
which could be an alert, right?
If they say they've lived herefor 20 or 25 years and the
social security number onlyissued 10 years ago, maybe it's
not their social securitynumber, or maybe it's, it's a
mistake.
So just keep an eye on thataddress mismatches identity
(12:08):
theft freezes.
So there is an identity,identity theft alert on their
credit.
Make sure they are who they saythey are, right?
Reviewing their identificationand excessive credit inquiries.
If this bar has 15, 20 creditinquiries in the last 10 days,
what's really going on here,make sure there's no funny
(12:31):
business could just be thatunfortunately they're letting
everybody who they talk to pulltheir credit, which is what they
shouldn't do, but.
Just keep an eye out for thosered flags and alerts because
there could be fraud.
Now you want to identify any ofthese errors, have them
corrected, and make sure thatyou address the concerns with
(12:52):
the borrower because some ofthese, uh, corrections may need
to be done.
at the Bureau level and not justlocally with the credit
reporting agency who you use topull the report.
Now, when you are reviewing thereport, besides looking at, you
know, uh, data accuracy, youalso want to review the report
(13:14):
and see what it actuallycontains.
You want to review the number oftrade lines and the length of
time that those trade lines havebeen opened.
You, the credit.
It's not just about creditscores, as you all know.
Uh, now there are scenarios withsome of our options in the non
(13:35):
QM world that if the borrowerhas three credit scores
reporting, then uh, op, youknow, the number of open trade
lines is not an issue.
But that is a case by case, uh,situation.
And some, uh, guidelines do askfor a certain number of trade
lines and others will state ifthey have three credit scores,
(13:58):
don't worry about how many opentrade lines they have.
So again, you want to review thetrade lines.
You want to see how they'rebeing handled, right?
Especially mortgages, whichwould be housing history,
because most of the non QMprograms, especially, are going
to look at how have you beenpaying your mortgage the last 12
(14:18):
months.
So definitely, uh, you want tolook at all of those, and you
want to look at to see ifthere's any credit events,
right?
Are there any bankruptcies,foreclosures, foreclosures.
Uh, short sales or anything likethat, that you can identify in
the credit report.
And very importantly, this isone people tend to miss, but
(14:39):
could come back at, um, andhaunt them, is Look for disputed
accounts, especially thosedisputed accounts with a
balance.
Why do I state this?
Well, it's all about theguidelines again, because if you
don't notice that there's anydisputed accounts on there,
right, and then you go,everything's great, full speed
(15:02):
ahead, run, you know, take, uh,borrow, submits, loan
application, loan applicationgets submitted.
To DU, you get the approveeligible, but you didn't know
that there was a disputedaccount until you read the
findings.
And the findings say, could sayone of two things.
(15:22):
We noted that there's a disputedaccount.
We were able to provide theapprove eligible with that, with
reviewing that disputed account,no further action required from
the borrower.
Or, uh, it may say, Um, wecannot determine, uh, the
information if they actuallyqualified because of the
(15:45):
disputed account.
And because of that, you have todowngrade your approval.
And submit manual underwrite,which we don't really have any
options, manual underwrite forconventional loans.
That's what it would tell you ina conventional loan.
Um, on an FHA loan, it's, it's,uh, written in the verbiage and
(16:09):
the findings, any disputedaccount on, uh, or accounts
totaling a thousand dollars orunder a thousand dollars.
You don't have to worry aboutit.
Continue.
Uh, no harm, no foul.
If the system gave you theapproved eligible, however, if
the total amount of the disputedaccounts is over a thousand
(16:29):
dollars, now, all of a suddenyour approved eligible is
downgraded to a manualunderwrite, which is max 43
percent DTI and not 56.
9.
Other considerations that, uh,that it throws at you that you
might not be able to meet.
So look for those disputedaccounts.
Oh, and in non QM.
(16:51):
It's all about the guidelines.
Most non QM, they're going totreat disputed accounts
differently.
Some will tell you, you need tobring the balance down to at
least 250 of that disputedaccount because, and then we
don't have to consider it.
However, the issue with disputedaccounts is If you need
(17:11):
automated underwriting approvalto pick up the fact that there's
no longer a disputed account,then those disputed accounts
need to be removed from thecredit report via a rapid
rescore after the customer hasthe account dispute removed from
the account.
Could take a bit to get thattaken care of.
So you want to make sure thatyou don't miss the disputed
(17:33):
accounts on the credit report.
That's one of the ones thatcould really come back and bite
you and ruin your deal.
So again, remember for AUSapproval, disputed accounts will
need to be removed via a rapidrescore.
So now we've talked about thecomponents of credit, how they
(17:54):
can be affected.
We talked about looking aterrors and how those things
could affect scores.
So now we need to identify thecredit simulation opportunities.
Now be aware of every creditreport that we pull at the
mortgage calculator includes theoption to run.
(18:15):
Two different types of creditsimulations.
Uh, credit simulations are a wayto see what potential there is
for the borrower to increasetheir credit score.
Now, the two simulations that wehave at our disposal, one is the
Wayfinder.
And the other is the what if.
(18:36):
Now be aware that the Wayfinderis a computer algorithm that
searches for the best path to adesired credit score goal.
It's only going to work as goodas you configure it, right?
So you have to be aware that theWayfinder comes preset with
certain maximum amounts that youcould spend per account.
(18:58):
So unless you go and youreconfigure the maximum that
you'll let.
Wayfinder tell you to spend onone account, it may tell you,
you have to pay off, you know,or pay down or do something with
nine accounts that could havebeen accomplished with one
because it was, uh, 6, 000 toone account, 9, 000 to another
instead of 1, 500 to eight ornine accounts because of the
(19:21):
limit.
Who could have been set at 1,500.
So that's really important aboutthe way finder and the, what if
is the one that gives you theMLO more discretion as to what
accounts to be paid off.
Cause you can go to the account,put a certain balance in that
account and see what impact ithas.
(19:43):
That has lowering that balanceon the credit score.
So that's why I really like the,what if I may use the wayfinder
just as an initial guide, butthen I'm going to go to the,
what if the fine tune, thesimulation, again, the bar may
have already paid some accountsdown.
So then you may also want to askthem, what are the new balances
(20:05):
where you can plug in the newbalances in the, what if to see
what their credit score would benow.
Uh, when you pull it, um, so thegoal of the credit simulation is
to increase the middle score.
Now, I gotta say that becausewhen you're looking to increase
one score, you want to make surethat's what, that's what you
(20:26):
have to be aware of that.
You have to make sure thatwhatever score you increase when
it gets to whatever number isgetting.
That that is numerically themiddle score.
So for example, like in thebullet point I have there, if
the goal is 660 and the scoresare experienced with a 630.
(20:46):
Equifax with a six 50 andTransUnion with a 6 57.
Then the MLO is gonna need torecore uh, two of the accounts.
In this case, we're gonna havethem do Equifax at a six 50 and
TransUnion at a 6 57 to ensurethat our middle score is gonna
be at least a six 60.
And you could have pickedExperian instead of Equifax, for
(21:09):
example.
It really depends what thesimulation told you.
Sometimes you're going to getmore juice with one, uh, over
the other when you're playingwith the accounts and you're not
going to know that until youstart doing the, what if, but
keep in mind then that you wantto be numerically.
in the middle when the dustsettles.
Keep in mind that rapid rescorescan be completed in five to
(21:30):
seven days.
Sometimes they, you know, theycan be done a little bit
quicker, especially if you pay alittle extra for a rush.
I've had them done in 24 hours,but they're only as good as the
data that you give them.
To do a rapid rescore, you needto provide certain information,
certain letters, certaindocumentation, that if the
documentation doesn't work, therecord score will be rejected
and you got to try again.
(21:51):
And then you need to pull a newcredit report.
to obtain the new scores.
And most importantly, uh, MLOsbe aware because I sometimes see
these rapid re score suggestionsMLOs have sent to borrowers with
like paying down 13 accounts.
And I've asked the MLO, I said,uh, by the way, are you aware
(22:13):
that you got to pay for that rescore of 13 accounts and that
that's going to cost you likesix or seven hundred dollars?
And they're like, no, I wasn'taware that I had to pay for it.
I'm like, yup, not the customer.
You're going to pay for it.
So try to really make sure thatthe rescore that you're offering
is the shortest and most directpath to the objective because
(22:37):
the borrower cannot pay for thecost of the rescore.
So now you, you've identifiedsimulation opportunities.
You've suggested them, the cut,the, the borrower did what.
They, you told them to do perthe rescore.
Uh, you, uh, uh, now obtain theletters for the rescore.
(23:00):
So now what do you do to updatethe credit report data?
Well, we've been talking aboutrescores, right?
Uh, but.
In actuality, credit report datais, is updated in one of two
ways, depending what you need,right?
If you do not need theinformation to be picked up by
(23:23):
any type of automatedunderwriting, it's just the
underwriter wants to see it onthe report for their own
calculations, then you would doa credit supplement, a credit
supplement.
Is an update of the accountinformation at the credit
reporting agency level only.
(23:44):
and will not be picked up byAUS.
So for example, uh, we use CICas our credit reporting agency,
so we would request CIC tocomplete a credit supplement.
When they complete a creditsupplement, they call the
account, uh, who it may be, inthis case, uh, maybe it's a
credit supplement, uh, to updatethe payment history on a
(24:06):
mortgage trade line through thedate of closing, which is a very
common requirement.
So then, uh, CIC credit willcall ABC mortgage company.
They may have to do it with theborrower on the line via a
conference call, depending onthe requirements of the mortgage
company, and then they willverify the payment history,
right?
(24:26):
The amount balance, if they'reon time, any late payments.
And when was the last paymentmade?
That would be a creditsupplement at the agency level
only.
Now, if you need the change toappear at the bureau level at
the Equifax ExperienceTransUnion so that automated
(24:47):
underwriting picks up thechange, which is critical, then
you need to do a rapid rescore.
That's where you would do therapid rescore, for example, to
remove the dispute after thecustomer has the dispute removed
and provides the letter fromthe, uh, from the creditor that
says here from ABC creditor.
(25:08):
John Smith, uh, no long, nolonger has a dispute on that
account for XYZ, then thatletter is the letter that gets
sent to the bureau so that thenthe information can be pushed in
a short amount of time andappear and once it appears,
then.
You pull the new credit reportto get the new credit scores.
(25:31):
So rapid rescores are forprocess where the data is pushed
to the bureau level, allowing aU S to pick up the changes.
And again, costs cannot be paidby the borrower.
Usually it takes three to fivedays to process unless you pay
for a rush.
Now, some of the common, which Ijust alluded to, uh, updating
(25:52):
that is requested, the mostcommon one is.
Mortgage trade line updates.
Mortgage trade lines are goingto be updated in one of two
ways.
Uh, either or they're going toask for one of two things.
They're either going to ask fora payment history, uh, that
(26:12):
needs to be updated for anexisting account that's
reporting on their creditreport.
It usually credit reports arebehind anywhere from one to two
months on the data.
So right now that could be maybea reporting date of April and
you need it.
If you're closing in June orreporting date of at least may,
right?
So, If that's the case, thenyou're going to request a credit
(26:36):
supplement to update the tradeline at the agency level.
However, if the mortgage doesnot appear on the borrower's
credit report, then you need tohave that trade line updated.
added via a credit supplement.
That's going to be the add atrade line where again, you also
(26:58):
provide the information and thenthey will call the, the trade
line, verify the data, and thenput it on the credit supplement
and your credit report will beupdated at the agency level.
Again, if these trade lines needto be picked up by AUS, then
(27:19):
you're going to have to havethese trade lines added via a
rapid Rescore.
So now last but not least here,right, is the guidance to the
borrowers, right?
Now we already talked creditsimulation, we already talked
all that stuff with them, butwhat is the basic guidance you
(27:40):
want to give to your borrowers,uh, at the time that they're
contemplating the application?
Well, some of this stuff ispretty basic.
Others is not, but we'll getinto it.
Anyhow, uh, in active creditcard accounts, this is something
people don't realize, but you'regoing to have credit cards.
And if you don't use them, evenif they're on a zero balance,
(28:02):
your credit score will go downbecause there's no payment
history to consider.
So make sure that they're usingtheir credit cards for at least
incidental expenses.
Like gasoline, you know, andthen paying them off where they
were.
We're not telling them run upyour credit cards.
We're just telling them, makesure you're using all your
(28:22):
credit cards so that there'spayment history that can be
considered for each card.
I mean, I've, I've seen this,uh, not using the credit cards,
lower a borrower's credit score,50, 60 points.
And then all of a suddenstarting to use them again,
jumps again.
Do not open any new accounts.
(28:44):
We already saw in the creditscoring model, new accounts, uh,
when they're open, they're goingto lower your credit score
simply because they're new.
Limited payment history.
Do not increase credit cardbalances.
That's another obvious one, butwe want to tell them because of
the proportion.
(29:06):
Uh, your utilization basicallyis why if you increase your
utilization, you're going todecrease your credit score.
Now the borrower can ask thecreditors to increase the credit
limit on their existing accountsbecause now if they increase the
limit and keep the balance thesame, they're going to decrease
(29:30):
their utilization and thenhopefully increase their credit
score.
Do not close out.
Any accounts, if they are paiddown or paid down to zero,
that's critical paying down tozero, but don't close them.
Because if you close them, younot only eliminate the payment
(29:51):
history and length of time ofthe account being open, that was
attributed to that account.
If you've had it for a while,but then you will also decrease,
or actually you will decreaseyour balance.
Limit available and you'llincrease your utilization.
Simply closing an account down.
If you had$10,000 in availablelimit and 5,000 in use and
(30:16):
you're 50% and you close downthat account that had, uh, 5,000
in limit, but zero use, nowyou're at a hundred percent
utilization and now you got5,000 limit and 5,000 use, and
now your credit's gonna drop tolike 605 80 if you're at a 500,
a hundred percent utilization.
(30:36):
Here's one that I've seen beenbeen able to take advantage of a
few times.
Have the borrower consider beingremoved from high balance
authorized user accounts, right?
Those don't add to their tradeline count.
Uh, people just have thembecause they, uh, they may help
your credit score.
However, if the authorized useraccount that you're on is maxed
(30:59):
out, then you're defeating thepurpose there.
And then last but not least,there's certainly many free
services out there that allowsborrowers to review their credit
report.
You even have annual creditreport that allows you to Allows
you annual credit report.
com that allows you to reviewher report from all three credit
(31:22):
bureaus for free once a year.
So take advantage of that, uh,because we definitely want to
review our credit regularly forfraud.
Make sure there aren't anyaccounts or that you don't
recognize.
It's very easy for that tohappen, especially if whoever
did it is still in the processof making the payments.
But, you know, at some pointthey would stop making those
(31:43):
payments.
And then that's when you willfind out.
So you don't want to wait tillit's too late.
So, uh, remember we're alwayslooking to be the loan
consultant at the mortgagecalculator.
The reason that we think it's soimportant to understand what
affects credit is so that youcan properly consult your
borrower.
Don't just blindly look to referthem to a credit reporting
(32:05):
agency where, I mean, a credit,credit repairing.
Company, let's say, excuse me,where all they may be doing is
just looking to take some moneyfrom the borrower and then never
talk to them again.
And then, uh, you were, could beon the hook, uh, for that bad
referral.
So always look to be the loanconsultant and always look to
(32:26):
assist the borrowers bestinterests.
All right.
Thank you.
I don't see any questionsreally, but, uh, I hear
Wayfinder is not going to bearound soon.
(32:47):
Uh, I haven't heard any of that.
Could be true.
All right.
Well, I don't see anotherquestion, so I guess we'll go
ahead and wrap it up.
Great info tonight, though.
Definitely useful for everyoneto know.
Remember, we do this at 7 p.
m.
Eastern time every Tuesday,Wednesday, and Thursday.
So we will be back here tomorrowwith a new topic.
(33:09):
We appreciate everybody tuningin.
We'll see you tomorrow 7 p.
m.
Eastern for the next episode ofthe Lone Officer Training
Series.
So welcome everyone.
My name is Kyle Hiersche.
I'm the COO of the mortgagecalculator joined here by our
president at Hiersche and oursales manager, Jose Gonzalez.
We are a lender that specializesin non QM loans and what we do
every Tuesday, Wednesday, andThursday evening at 7 PM Eastern
on the show is go through a newloan officer training topic.
And tonight we're going to talkabout credit reports and credit
(00:20):
simulation.
So I will let the master Josetake over here.
Good evening, everybody.
Thank you for joining us fortonight's training on credit
report review fundamentals,right?
We want to train you so that youknow how to identify different
(00:41):
issues and opportunities in thecredit report, especially credit
simulation opportunities, whichcould make or or break your
deal, right?
How many times has, has a creditsimulation not been attempted
and then all of a sudden you'retwo points short from the next
level because something justhappened with your loan,
(01:01):
guidelines changed, whatever mayhave happened, and now all of a
sudden you're in limbo.
So we always want to beproactive in reviewing the
credit report and identifyingany opportunities that the
borrower may have.
To increase their credit score,which may also allow them to
increase their LTV and decreasethe interest rate and the cost
(01:24):
or the cost on the rate, right?
So let's get right into it now.
Um, it's ironic because today,uh, So, I was questioned by some
MLOs about if we had any creditreport repair company that we
can recommend.
(01:45):
Uh, we don't usually like to dothat.
What we do like to do is be loanconsultants and understand what
may be causing the issues.
To the borrower's credit so thatwe can properly explain it to
the borrower and so that theycan take the necessary action.
Usually that's all that isneeded to assist the borrower
(02:08):
with their credit report andtheir credit scores.
So let's give, uh, let's get alittle history on credit
reports.
Uh, when did they actually comeabout?
Well, the, the attempts tostandardize the credit reporting
process dates back to 1841 whenthe Mercantile Agency was
(02:32):
founded.
That was the first attempt, uh,at quantifying the data.
Now, the first standardizedcredit score, the FICO score was
introduced in 1989.
Seems like it's been around alot longer than that, but prior
to 1989.
We didn't really have FICOscores, credit scores, so
(02:54):
Equifax and TransUnion followedsoon thereafter.
So that was Experian that cameout with the FICO score.
Now, what did, um, this creditscoring system allow?
Well, it eliminated subjectivereview.
Of borrower credit, right?
(03:15):
It's very important that we lookat borrower credit in an
objective point of view.
So they they form the creditscore model, which we're going
to discuss in the next slide asto how that model analyzes to
credit.
Having These, uh, creditscoring, uh, models and credit
(03:38):
reports also sped up the loanapproval process and increased
origination output, right?
That's good stuff for us.
MLOs, right?
We're talking about addingsystems here.
It allowed automation, scaling,and increased profit.
And as if you all would knowalready, Equifax, Experian, and
(04:01):
TransUnion are the three creditbureaus used.
But what you need to understandis that each credit bureau has
their own algorithm to interpretthe data.
So the, and I'm sure you, that'swhy the, the scores are
different in all three bureaus.
(04:21):
Uh.
And I'm sure you've seen thisbefore where, like, one account
may not report to one bureau, itreports to another bureau, uh,
so, or they could only have oneaccount and the three bureaus
report three different scoresbecause they analyze the data
differently.
(04:43):
So, uh, what are the scoreranges, right?
And how can it impact our loan,our loan origination?
Well, anything 750 or above, youcan consider that excellent.
Best pricing and loan to valueon all of our products,
especially non QM products, isavailable with a 740 plus credit
(05:07):
score.
700 to 749 is considered good,still many loan options.
However, below 700, uh, we havea lot of options that get cut
off.
So it seems like 700 is a verycritical number.
650 to 699 is going to be fair,considered fair credit.
(05:31):
Be aware that 660 660 is acutoff for many non QM options.
So you'll see below 660, uh,LTVs drop drastically for a lot
of non QM options like our bankstatement loans and our DSCR
loans.
For example, 600 to 649 would beconsidered poor credit, uh,
(05:57):
Conventional minimum FICO scoreis 620 per the matrix, even
though, you know, it's going totell you minimum FICO determined
by AUS, and then you got toworry about mortgage insurance.
Non QM options are going to beavailable between the 600 and
the 649, but they're going to belimited and at reduced LTVs.
(06:18):
And below 600, that's my Youknow, you could pretty much
consider that bad credit.
Now there are still options, butfor example, FHA automated
underwriting will require an LTVat 90 percent or below.
Uh, when, at 90%, when the, um,FICO is 580 or below, you're
(06:39):
also below 600, you're going tohave limited VA and USDA options
and very limited non QM options.
We do have.
Uh, options on non QM down to a575 credit score or DSCR
options, for example, go up to a65 percent LTV down to, uh, at a
(07:00):
575 credit score.
So these are your credit scoreranges.
Now, what are now again, nowwe're getting into here is.
The parts of the lesson that'sgoing to allow you to be the
consultant to understand why,when you're reviewing the credit
(07:20):
report, why are certain, youknow, what, why is the score
reflecting what it's reflecting?
So you got to understand thenthe following components that
make up the credit scoringmodels.
Payment history makes up 35%.
Of the score payment history isaffected by late payments, uh,
(07:45):
credit utilization, the, um, thepercentage of their credit that
they're using, right.
Which is basically availablecredit, which is your total
limit versus utilization, whichis the amount being used.
Uh, so high balance to limitratio is going to affect your
(08:06):
credit utilization.
In other words, if the balanceis.
900 and the limit's 1, 000,you're at 90%.
That's a very high utilizationratio.
The length of credit history is15 percent of the scoring model,
and that is affected by the ageof the accounts.
(08:30):
Reason being, uh, thoseaccounts, the longer that
they've been around, the morepayment history that you can
review.
Right.
So it adds more weight to, youknow, the longer they've been
making payments.
So the length of history is 15percent credit mix, right?
(08:50):
The, so it's 10 percent of thetotal and credit mix is affected
by the types.
of accounts in use, right?
Depending is it installmentaccounts or which are secured or
are they revolving accounts,which are unsecured.
And then new or recent creditaccounts makes up 10 percent of
(09:15):
the scoring model.
This is affected by newaccounts, which have a limited
payment history.
So, If you got some newaccounts, you're going to see a
drop in the credit for at leastthree, four, five, six months
until there is enough of apayment history established so
that, uh, the score can go backup.
(09:37):
So again, payment history, 35%,credit utilization, 30, length
of credit history, 15 creditmix, 10 percent new and recent
credit, 10 percent of theaction.
So now once we are reviewing thecredit report, we have to review
(09:59):
it for, uh, accuracy.
So you want to review the datafor accuracy and for alerts.
The system itself will give youdifferent alerts.
So you want to, you want toensure that the bar information
is correct, uh, becauseincorrect information on a
(10:19):
credit report, and I'm not justreferring to the social security
number, because that's anobvious, but I'm talking about
things like date of birth.
Where they live, their residenceaddress there, if they use their
complete name, including middlename or middle initial, um,
these are different.
(10:39):
These are different items thatif they are misspelled, if the
data is different.
It may not pick up the completeborrower credit file.
So you want to make sure thatyou have their correct address,
correct date of birth, obviouslycorrect social security number,
correct spelling of their name,all of those things.
(11:00):
And if they've lived at a prioraddress system will sometimes
ask you, you know, prior addressto this one, put that one in
too, because that credit may becoming up under that prior
address as well.
So remember any, Errors in thisdata could skew the information
you receive in your report.
(11:20):
Now you want to review thereport for red flags and alerts
like again, easy ones, socialsecurity number mismatch or
issue date, not just forpurposes of, uh, accuracy of the
data, but, you know, just to seeif there could be any, anything
going on.
Uh, like, uh, it's not reallythe borrower's information, you
(11:44):
know.
So again, social security numbermismatch issue date would mean
that that social security wasissued within the last 10 years,
which could be an alert, right?
If they say they've lived herefor 20 or 25 years and the
social security number onlyissued 10 years ago, maybe it's
not their social securitynumber, or maybe it's, it's a
mistake.
So just keep an eye on thataddress mismatches identity
(12:08):
theft freezes.
So there is an identity,identity theft alert on their
credit.
Make sure they are who they saythey are, right?
Reviewing their identificationand excessive credit inquiries.
If this bar has 15, 20 creditinquiries in the last 10 days,
what's really going on here,make sure there's no funny
(12:31):
business could just be thatunfortunately they're letting
everybody who they talk to pulltheir credit, which is what they
shouldn't do, but.
Just keep an eye out for thosered flags and alerts because
there could be fraud.
Now you want to identify any ofthese errors, have them
corrected, and make sure thatyou address the concerns with
(12:52):
the borrower because some ofthese, uh, corrections may need
to be done.
at the Bureau level and not justlocally with the credit
reporting agency who you use topull the report.
Now, when you are reviewing thereport, besides looking at, you
know, uh, data accuracy, youalso want to review the report
(13:14):
and see what it actuallycontains.
You want to review the number oftrade lines and the length of
time that those trade lines havebeen opened.
You, the credit.
It's not just about creditscores, as you all know.
Uh, now there are scenarios withsome of our options in the non
(13:35):
QM world that if the borrowerhas three credit scores
reporting, then uh, op, youknow, the number of open trade
lines is not an issue.
But that is a case by case, uh,situation.
And some, uh, guidelines do askfor a certain number of trade
lines and others will state ifthey have three credit scores,
(13:58):
don't worry about how many opentrade lines they have.
So again, you want to review thetrade lines.
You want to see how they'rebeing handled, right?
Especially mortgages, whichwould be housing history,
because most of the non QMprograms, especially, are going
to look at how have you beenpaying your mortgage the last 12
(14:18):
months.
So definitely, uh, you want tolook at all of those, and you
want to look at to see ifthere's any credit events,
right?
Are there any bankruptcies,foreclosures, foreclosures.
Uh, short sales or anything likethat, that you can identify in
the credit report.
And very importantly, this isone people tend to miss, but
(14:39):
could come back at, um, andhaunt them, is Look for disputed
accounts, especially thosedisputed accounts with a
balance.
Why do I state this?
Well, it's all about theguidelines again, because if you
don't notice that there's anydisputed accounts on there,
right, and then you go,everything's great, full speed
(15:02):
ahead, run, you know, take, uh,borrow, submits, loan
application, loan applicationgets submitted.
To DU, you get the approveeligible, but you didn't know
that there was a disputedaccount until you read the
findings.
And the findings say, could sayone of two things.
(15:22):
We noted that there's a disputedaccount.
We were able to provide theapprove eligible with that, with
reviewing that disputed account,no further action required from
the borrower.
Or, uh, it may say, Um, wecannot determine, uh, the
information if they actuallyqualified because of the
(15:45):
disputed account.
And because of that, you have todowngrade your approval.
And submit manual underwrite,which we don't really have any
options, manual underwrite forconventional loans.
That's what it would tell you ina conventional loan.
Um, on an FHA loan, it's, it's,uh, written in the verbiage and
(16:09):
the findings, any disputedaccount on, uh, or accounts
totaling a thousand dollars orunder a thousand dollars.
You don't have to worry aboutit.
Continue.
Uh, no harm, no foul.
If the system gave you theapproved eligible, however, if
the total amount of the disputedaccounts is over a thousand
(16:29):
dollars, now, all of a suddenyour approved eligible is
downgraded to a manualunderwrite, which is max 43
percent DTI and not 56.
9.
Other considerations that, uh,that it throws at you that you
might not be able to meet.
So look for those disputedaccounts.
Oh, and in non QM.
(16:51):
It's all about the guidelines.
Most non QM, they're going totreat disputed accounts
differently.
Some will tell you, you need tobring the balance down to at
least 250 of that disputedaccount because, and then we
don't have to consider it.
However, the issue with disputedaccounts is If you need
(17:11):
automated underwriting approvalto pick up the fact that there's
no longer a disputed account,then those disputed accounts
need to be removed from thecredit report via a rapid
rescore after the customer hasthe account dispute removed from
the account.
Could take a bit to get thattaken care of.
So you want to make sure thatyou don't miss the disputed
(17:33):
accounts on the credit report.
That's one of the ones thatcould really come back and bite
you and ruin your deal.
So again, remember for AUSapproval, disputed accounts will
need to be removed via a rapidrescore.
So now we've talked about thecomponents of credit, how they
(17:54):
can be affected.
We talked about looking aterrors and how those things
could affect scores.
So now we need to identify thecredit simulation opportunities.
Now be aware of every creditreport that we pull at the
mortgage calculator includes theoption to run.
(18:15):
Two different types of creditsimulations.
Uh, credit simulations are a wayto see what potential there is
for the borrower to increasetheir credit score.
Now, the two simulations that wehave at our disposal, one is the
Wayfinder.
And the other is the what if.
(18:36):
Now be aware that the Wayfinderis a computer algorithm that
searches for the best path to adesired credit score goal.
It's only going to work as goodas you configure it, right?
So you have to be aware that theWayfinder comes preset with
certain maximum amounts that youcould spend per account.
(18:58):
So unless you go and youreconfigure the maximum that
you'll let.
Wayfinder tell you to spend onone account, it may tell you,
you have to pay off, you know,or pay down or do something with
nine accounts that could havebeen accomplished with one
because it was, uh, 6, 000 toone account, 9, 000 to another
instead of 1, 500 to eight ornine accounts because of the
(19:21):
limit.
Who could have been set at 1,500.
So that's really important aboutthe way finder and the, what if
is the one that gives you theMLO more discretion as to what
accounts to be paid off.
Cause you can go to the account,put a certain balance in that
account and see what impact ithas.
(19:43):
That has lowering that balanceon the credit score.
So that's why I really like the,what if I may use the wayfinder
just as an initial guide, butthen I'm going to go to the,
what if the fine tune, thesimulation, again, the bar may
have already paid some accountsdown.
So then you may also want to askthem, what are the new balances
(20:05):
where you can plug in the newbalances in the, what if to see
what their credit score would benow.
Uh, when you pull it, um, so thegoal of the credit simulation is
to increase the middle score.
Now, I gotta say that becausewhen you're looking to increase
one score, you want to make surethat's what, that's what you
(20:26):
have to be aware of that.
You have to make sure thatwhatever score you increase when
it gets to whatever number isgetting.
That that is numerically themiddle score.
So for example, like in thebullet point I have there, if
the goal is 660 and the scoresare experienced with a 630.
(20:46):
Equifax with a six 50 andTransUnion with a 6 57.
Then the MLO is gonna need torecore uh, two of the accounts.
In this case, we're gonna havethem do Equifax at a six 50 and
TransUnion at a 6 57 to ensurethat our middle score is gonna
be at least a six 60.
And you could have pickedExperian instead of Equifax, for
(21:09):
example.
It really depends what thesimulation told you.
Sometimes you're going to getmore juice with one, uh, over
the other when you're playingwith the accounts and you're not
going to know that until youstart doing the, what if, but
keep in mind then that you wantto be numerically.
in the middle when the dustsettles.
Keep in mind that rapid rescorescan be completed in five to
(21:30):
seven days.
Sometimes they, you know, theycan be done a little bit
quicker, especially if you pay alittle extra for a rush.
I've had them done in 24 hours,but they're only as good as the
data that you give them.
To do a rapid rescore, you needto provide certain information,
certain letters, certaindocumentation, that if the
documentation doesn't work, therecord score will be rejected
and you got to try again.
(21:51):
And then you need to pull a newcredit report.
to obtain the new scores.
And most importantly, uh, MLOsbe aware because I sometimes see
these rapid re score suggestionsMLOs have sent to borrowers with
like paying down 13 accounts.
And I've asked the MLO, I said,uh, by the way, are you aware
(22:13):
that you got to pay for that rescore of 13 accounts and that
that's going to cost you likesix or seven hundred dollars?
And they're like, no, I wasn'taware that I had to pay for it.
I'm like, yup, not the customer.
You're going to pay for it.
So try to really make sure thatthe rescore that you're offering
is the shortest and most directpath to the objective because
(22:37):
the borrower cannot pay for thecost of the rescore.
So now you, you've identifiedsimulation opportunities.
You've suggested them, the cut,the, the borrower did what.
They, you told them to do perthe rescore.
Uh, you, uh, uh, now obtain theletters for the rescore.
(23:00):
So now what do you do to updatethe credit report data?
Well, we've been talking aboutrescores, right?
Uh, but.
In actuality, credit report datais, is updated in one of two
ways, depending what you need,right?
If you do not need theinformation to be picked up by
(23:23):
any type of automatedunderwriting, it's just the
underwriter wants to see it onthe report for their own
calculations, then you would doa credit supplement, a credit
supplement.
Is an update of the accountinformation at the credit
reporting agency level only.
(23:44):
and will not be picked up byAUS.
So for example, uh, we use CICas our credit reporting agency,
so we would request CIC tocomplete a credit supplement.
When they complete a creditsupplement, they call the
account, uh, who it may be, inthis case, uh, maybe it's a
credit supplement, uh, to updatethe payment history on a
(24:06):
mortgage trade line through thedate of closing, which is a very
common requirement.
So then, uh, CIC credit willcall ABC mortgage company.
They may have to do it with theborrower on the line via a
conference call, depending onthe requirements of the mortgage
company, and then they willverify the payment history,
right?
(24:26):
The amount balance, if they'reon time, any late payments.
And when was the last paymentmade?
That would be a creditsupplement at the agency level
only.
Now, if you need the change toappear at the bureau level at
the Equifax ExperienceTransUnion so that automated
(24:47):
underwriting picks up thechange, which is critical, then
you need to do a rapid rescore.
That's where you would do therapid rescore, for example, to
remove the dispute after thecustomer has the dispute removed
and provides the letter fromthe, uh, from the creditor that
says here from ABC creditor.
(25:08):
John Smith, uh, no long, nolonger has a dispute on that
account for XYZ, then thatletter is the letter that gets
sent to the bureau so that thenthe information can be pushed in
a short amount of time andappear and once it appears,
then.
You pull the new credit reportto get the new credit scores.
(25:31):
So rapid rescores are forprocess where the data is pushed
to the bureau level, allowing aU S to pick up the changes.
And again, costs cannot be paidby the borrower.
Usually it takes three to fivedays to process unless you pay
for a rush.
Now, some of the common, which Ijust alluded to, uh, updating
(25:52):
that is requested, the mostcommon one is.
Mortgage trade line updates.
Mortgage trade lines are goingto be updated in one of two
ways.
Uh, either or they're going toask for one of two things.
They're either going to ask fora payment history, uh, that
(26:12):
needs to be updated for anexisting account that's
reporting on their creditreport.
It usually credit reports arebehind anywhere from one to two
months on the data.
So right now that could be maybea reporting date of April and
you need it.
If you're closing in June orreporting date of at least may,
right?
So, If that's the case, thenyou're going to request a credit
(26:36):
supplement to update the tradeline at the agency level.
However, if the mortgage doesnot appear on the borrower's
credit report, then you need tohave that trade line updated.
added via a credit supplement.
That's going to be the add atrade line where again, you also
(26:58):
provide the information and thenthey will call the, the trade
line, verify the data, and thenput it on the credit supplement
and your credit report will beupdated at the agency level.
Again, if these trade lines needto be picked up by AUS, then
(27:19):
you're going to have to havethese trade lines added via a
rapid Rescore.
So now last but not least here,right, is the guidance to the
borrowers, right?
Now we already talked creditsimulation, we already talked
all that stuff with them, butwhat is the basic guidance you
(27:40):
want to give to your borrowers,uh, at the time that they're
contemplating the application?
Well, some of this stuff ispretty basic.
Others is not, but we'll getinto it.
Anyhow, uh, in active creditcard accounts, this is something
people don't realize, but you'regoing to have credit cards.
And if you don't use them, evenif they're on a zero balance,
(28:02):
your credit score will go downbecause there's no payment
history to consider.
So make sure that they're usingtheir credit cards for at least
incidental expenses.
Like gasoline, you know, andthen paying them off where they
were.
We're not telling them run upyour credit cards.
We're just telling them, makesure you're using all your
(28:22):
credit cards so that there'spayment history that can be
considered for each card.
I mean, I've, I've seen this,uh, not using the credit cards,
lower a borrower's credit score,50, 60 points.
And then all of a suddenstarting to use them again,
jumps again.
Do not open any new accounts.
(28:44):
We already saw in the creditscoring model, new accounts, uh,
when they're open, they're goingto lower your credit score
simply because they're new.
Limited payment history.
Do not increase credit cardbalances.
That's another obvious one, butwe want to tell them because of
the proportion.
(29:06):
Uh, your utilization basicallyis why if you increase your
utilization, you're going todecrease your credit score.
Now the borrower can ask thecreditors to increase the credit
limit on their existing accountsbecause now if they increase the
limit and keep the balance thesame, they're going to decrease
(29:30):
their utilization and thenhopefully increase their credit
score.
Do not close out.
Any accounts, if they are paiddown or paid down to zero,
that's critical paying down tozero, but don't close them.
Because if you close them, younot only eliminate the payment
(29:51):
history and length of time ofthe account being open, that was
attributed to that account.
If you've had it for a while,but then you will also decrease,
or actually you will decreaseyour balance.
Limit available and you'llincrease your utilization.
Simply closing an account down.
If you had$10,000 in availablelimit and 5,000 in use and
(30:16):
you're 50% and you close downthat account that had, uh, 5,000
in limit, but zero use, nowyou're at a hundred percent
utilization and now you got5,000 limit and 5,000 use, and
now your credit's gonna drop tolike 605 80 if you're at a 500,
a hundred percent utilization.
(30:36):
Here's one that I've seen beenbeen able to take advantage of a
few times.
Have the borrower consider beingremoved from high balance
authorized user accounts, right?
Those don't add to their tradeline count.
Uh, people just have thembecause they, uh, they may help
your credit score.
However, if the authorized useraccount that you're on is maxed
(30:59):
out, then you're defeating thepurpose there.
And then last but not least,there's certainly many free
services out there that allowsborrowers to review their credit
report.
You even have annual creditreport that allows you to Allows
you annual credit report.
com that allows you to reviewher report from all three credit
(31:22):
bureaus for free once a year.
So take advantage of that, uh,because we definitely want to
review our credit regularly forfraud.
Make sure there aren't anyaccounts or that you don't
recognize.
It's very easy for that tohappen, especially if whoever
did it is still in the processof making the payments.
But, you know, at some pointthey would stop making those
(31:43):
payments.
And then that's when you willfind out.
So you don't want to wait tillit's too late.
So, uh, remember we're alwayslooking to be the loan
consultant at the mortgagecalculator.
The reason that we think it's soimportant to understand what
affects credit is so that youcan properly consult your
borrower.
Don't just blindly look to referthem to a credit reporting
(32:05):
agency where, I mean, a credit,credit repairing.
Company, let's say, excuse me,where all they may be doing is
just looking to take some moneyfrom the borrower and then never
talk to them again.
And then, uh, you were, could beon the hook, uh, for that bad
referral.
So always look to be the loanconsultant and always look to
(32:26):
assist the borrowers bestinterests.
All right.
Thank you.
I don't see any questionsreally, but, uh, I hear
Wayfinder is not going to bearound soon.
(32:47):
Uh, I haven't heard any of that.
Could be true.
All right.
Well, I don't see anotherquestion, so I guess we'll go
ahead and wrap it up.
Great info tonight, though.
Definitely useful for everyoneto know.
Remember, we do this at 7 p.
m.
Eastern time every Tuesday,Wednesday, and Thursday.
So we will be back here tomorrowwith a new topic.
(33:09):
We appreciate everybody tuningin.
We'll see you tomorrow 7 p.
m.
Eastern for the next episode ofthe Lone Officer Training
Series.
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