My co-worker and I attended the 502 Loan Packaging: Common Mistakes session at the self-help housing conference in San Antonio and we are hoping you can clarify a couple questions for us.
The first question is regarding scores. It is not a requirement for applicants to have a minimum score of 640, correct? My understanding is that if a borrower has a verified score of 610 and has no indicators of unacceptable credit and they have at least three accounts on their report that meet the 12 month payment history, then they do not need an additional three lines of alternate credit. Please let me know if that is correct or if we should be asking for an additional three.
The second question is regarding accounts that come up on the report when needing alternate lines of credit. I hope I can explain this correctly. For example, if an applicant’s credit report shows that a score is not verified or they do not have three accounts that meet the requirements to verify the score (12 month payment history), but they do have one account that meets it, we can and should count that as one line of credit and then just request two alternate lines or one, if they have a landlord verification that shows at least 12 months of payments because we can count that also as an alternate credit line? Also, if an account is closed but it is within 24 months and had a minimum of 12 payments, that can also be used, right? The main question is can we use the accounts already showing on the report?
I sought out your San Antonio class instructor and received additional guidance and clarification:
As indicated in Chapter 4 of the Handbook-1-3550, applicants with no outstanding judgments obtained by the United States in a Federal court and who have more than one credit score listed on their credit report that result in a reliable credit score of 640 or higher are automatically considered to have acceptable credit histories. Please note that this guidance places a special emphasis on the word “reliable” when referring to the credit score.
A credit score is reliable if the applicant has a minimum of three trade lines that have been open and active for at least 12 months within the past 24 months from the date of the credit report. To make this determination, the loan originator must first look at the “Last Activity” date of the account. If the last activity reported for the account is older than 24 months from the date of the credit report, the account cannot be used for credit score reliability. If the last activity reported for the account falls within the past 24 months, the next step is to confirm that payments were made for at least 12 months within the two-year period. If less than 12 payments were made, the account cannot be used to validate the credit score reliability. If the account does indicate a payment history of at least 12 months, the account can be used to deem the credit score reliable even if the account is currently closed.
Collections do not count as “trade lines” to determine credit score reliability but must be considered in the credit analysis even if the applicant’s non-traditional credit is in good standing.
When you have to obtain non-traditional credit for an applicant, if there are reliable credit lines on the credit report you use those as one/two of the three lines needed for evaluation. You do not get three additional sources no matter what is on the credit report but rather, however many are needed to equal three lines. So if the credit report shows one reliable credit line you need two non-traditional sources, and if it shows two reliable lines you only need to obtain one additional non-traditional source of credit. In the case of joint applicants, you need a total of three lines for each applicant (joint lines that show on both credit reports/are in both names, if reliable, count once for each applicant). We cannot ignore derogatory credit lines and we cannot ignore satisfactory/reliable credit lines.
I know this has been an area in the regulations that has caused lots of requests for further clarification and I hope this helps!
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