Mortgages Expert Witness On Loan Underwriting Part 5

In Basic Characteristics And “Life” of Residential Mortgage Loans mortgages expert witness J. F. “Chip” Morrow writes:

The underwriter must also evaluate the character risk of the borrower. Statistics have shown that past satisfactory payment credit history indicates with high probability that the prospective borrower will make future payments including this new loan. The underwriter analyzes the prospective borrower’s credit history by obtaining a Residential Mortgage Credit Report (“Credit Report”). This Credit Report includes the prospective borrower’s credit histories for the last seven years. This includes credit histories for credit cards, automobile loans, student loans, other home loans, etc., as well as negative credit information including bankruptcies, notices of default, foreclosures and public records. As a requirement of the Credit Report, it must contain at least two of the three borrower’s FICO scores ─ Fair Isaac Score, Beacon Score and Empirica.

A FICO score is a numerical value that ranges between 300 and 850, with the low end of the scale representing a poorer credit risk. Loan entities then use the borrower’s FICO score to chart whether or not a prospective borrower is eligible to receive a mortgage. During the underwriting process, the underwriter must continually be aware of the “red flags” that indicate that the borrower may have problems repaying the loan, that the borrower may not qualify for the type of mortgage loan being sought or that there may be fraud. Freddie Mac has put out a guide called Fraud Prevention Best Practices that outlines these red flags for the various documentation provided by the borrower, the appraiser and the credit reporting agencies.

For example, among the 15 red flags for a mortgage loan application are significant or contradictory changes in debt from the initial to final application and a non-purchasing spouse.
For credit reports, among the 17 red flags are employment cannot be verified by a credit bureau, recent inquiries from other mortgage lenders and indebtedness discussed on the mortgage application varies from that reflected on the credit report.