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Loan Officer Training part 3 - How to read a credit report

By Edited Feb 12, 2016 0 0

Now that you've entered the customer's 2 year address history it's time to pull credit.  This is obviously a very important step in the loan process.  Your customer's credit report will basically tell you if you have a deal or not. 

Pulling someone's credit should not be taken lightly as this can lower their credit score.  Will a credit pull or credit inquiry drastically lower your customer's credit score?  No.  But people are hesitant to allow you to pull their credit because it has been ingrained in them from a very early age that it will lower their credit score and that they should never allow anyone to do this.  Everyone of us knows that conversation we had with our parents as a child: "Timmy, always look both ways before you cross the street, never take candy from strangers, never do drugs, and whatever you do, never let anyone pull your credit."

Because pulling someone's credit is a big deal you don't want to dance around the issue.  As soon as you enter the customer's complete 2 year address information you should immediately say, "Mr Jones, I will need your permission to pull your credit report, do I have your permission?"  Notice that this is a closed-ended question.  You are not opening the conversation up for discussion.  Your objective is not to debate the pro's and con's with your customer of having their credit pulled.  This would be a long conversation and most of the time will end up with you not pulling the credit.  You are looking for a simple "yes" or "no" from the customer. 

An exceptional Loan Officer would never say, "would it be ok if I take a look at your credit?", or "So how's your credit?  Would you mind if I take a look at it?"  This is unprofessional and most people will not allow you to pull their credit if asked in this manner (I know I wouldn't).  As long as you ask politely, yet in a firm, professional manner, you will hardly ever receive an objection from your customer when it comes to pulling their credit.  It is simply part of the process and your customer will understand that you need to do this in order to determine if they qualify for a loan. 

Now that you've pulled the credit report and performed the property security verification which typically will involve having the customer identify 2 creditors on the credit report with corresponding payments and balances for those two accounts, it's time to determine whether you have a deal. 

The first thing you will look for will be the credit score.  All 3 credit bureaus (Trans Union, Experian and Equifax) will typically report and you will be using the middle of the 3 scores to determine the  score that will be used to price the loan.  This method of credit scoring will vary a little from lender to lender but most lenders will employ this method.  If only 2 bureaus are reporting then the lower of the 2 scores will be used to price the loan.  If only one score is reporting or no score is reporting, check to ensure you have the social security number entered correctly.  Tip, if the social security number has not been entered correctly it may show as a series of X's, something like this: 432-XX-XXXX.  If the social security number has been entered correctly and you are still only getting one of the three credit bureaus reporting or none reporting then you have an invalid credit score which means you have no loan.

620 is the magic number you are looking for on a credit report.  If the score is under 620 your chances of the loan making it through Underwriting will be less than 5%.  Yes, it is possible to get a loan through Underwriting with less than a 620 credit score but in today's lending environment there better be some big compensating factors and a good story for this to happen.  Other than a 620 or higher credit score, what are we looking for on the credit report.

A foreclosure within the past 4 years, bankruptcy within the last 2 years, short sale within the past 2 years are deal-killers no matter what the story is.  A late payment on any account after a bankruptcy will be closely scrutinized by Underwriting and could be tough to get around.  Pay careful attention to open tax liens and open judgments as these will more than likely have to be paid prior to closing.  Mortgage lates during the past 12 months can also be very difficult to get around.

We could spend a full day talking about how to analyze a credit report but a couple of other key things to look for that will help you.  Generally, to do a conventional loan with less than 20% down, Underwriting will want to see that your customer has 3 current open trade lines with 12 consecutive payments on each trade line.  One of these trade lines will need to be seasoned more 24 months.  Your customer will also need to have a 12 month housing history (which can count as one of your trade lines) with no late payments if doing a conventional loan with less than 20% down.  These are a lot of hoops to jump through right?  This is the lending environment we are in right now so adapt to it.  Leave the complaining to the lower producing Loan Officers.  You will get a lot of push back from customers who don't understand why things are so much different now than they were 5 years ago when you could get a loan if you had a pulse. 

An exceptional Loan Officer explains the guidelines so that they are easy for the borrower to understand and looks for alternatives such as an FHA loan where the guidelines are much more lenient when putting down less than 20%.  One more thing, whatever you do, never argue with your customer over guidelines.  Your goal is to help them find the product to fit their particular situation.  Your customer should feel you are working with them, not against them.  You have to master this concept if you are going to have a high conversion ratio.

 

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