Credit. 3.3-A General Requirements_. 3.3-B Credit Analysis. Section 3.3: Credit

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1 Credit 3.3-A General Requirements_ Obtain at least one, preferably two or three, credit scores for each borrower; all available scores must be obtained. The scores must be obtained from all major repositories such as Equifax, Experian and TransUnion. A single representative score must be selected for each borrower. If a total of three scores are obtained, the representative score shall be the middle one. If a total of two scores are obtained, the representative score is the lowest. If there are multiple borrowers on the loan, the representative loan score is the lowest of the respective borrower s scores. SNMC requires a minimum representative loan score of 620 for conventional loans or 640 for all government loans, unless specific program is more restrictive. All borrowers must meet this minimum requirement with the FHA exception listed below. FHA/VA/Rural Housing loans: Non-traditional credit on government loans has been eliminated. All loans must have at least one occupant borrower with a traditional credit history. Possible scenarios: Two borrowers with no credit scores: Not Allowed One occupant borrower with a credit score and one occupant borrower without a credit score: Allowed. The reported credit score is used for qualification and non-traditional credit does not need to be built for the borrower with no credit score. A valid credit score and an automated approval through TOTAL scorecard is required. Occupant borrower with no credit score and a non-occupant borrower with a credit score: Not allowed, because the occupant borrower would be required to build non-traditional credit which is no longer acceptable Occupant borrower with a credit score and a non-occupant borrower without a credit score: Not allowed. A non-occupant borrower must have a valid credit score. Jumbo loans: All borrowers must have a valid FICO score (see FHA program guidelines for specific requirements) 3.3-B Credit Analysis When evaluating the borrower s credit history and the validity of credit score, the following factors should be considered to determine if the borrower s credit is acceptable: The type and amount of outstanding credit Age of the borrower s credit history Balance-to-account-limit ratios Recent changes in the number of open accounts or overall amount of credit outstanding Payment history of all accounts Any recent inquiries shown on the credit report Any public record or collection item SNMC Page 1 March 3, 2011

2 3.3-B Credit Analysis (cont d) Generally speaking, SNMC will consider a credit score as valid if the credit consists of at least 3 trade lines each with a 24 month history. This is guidance only, underwriter discretion is required as some files may be acceptable with less credit and some files may require more. Please check the individual loan programs as some programs may be more restrictive. In determining a valid credit score, the borrower s credit history must be analyzed. Credit scores alone are not sufficient to make an informed decision. To determine the validity of the credit score: Verify all debts are disclosed on the credit report Verify there are no disputed accounts Determine each credit score is based on sufficient and accurate information Analyze the types of accounts or tradelines reported The acceptable credit history of one borrower cannot be used to offset the unacceptable credit history of another. SNMC requires an acceptable credit history for all borrowers, low debt to income ratios and/or low LTV is not a substitute and cannot be used to compensate for the lack of acceptable credit. The amount of outstanding debt the borrowers have indicates credit risk. Generally, high balances indicate greater risk. However, the proportion of those balances to the total amount of credit available and the proportion to the borrower s income are the most important factors in determining risk. 3.3-B1 Age of Documents Information to make a credit decision must be current. All credit documents in the file, i.e. credit report, paystubs, bank statements, etc. cannot be over 60 days old at time of closing. Underwriters should review documentation carefully and make sure the expiration date of their approval is prior to the oldest credit document being over 60 days. This requirement applies regardless of the credit expiration date on the AUS findings 3.3-B2 Authorized User Accounts Borrowers whose credit history include limited trade lines and show one or more of those limited trade lines as authorized user accounts will require additional scrutiny. Authorized users are individuals given permission by the credit account owner to have access to and use of an account. Typically, an authorized user is a relative who is managing credit for the first time. If the primary account holder is another borrower on the transaction no further action is required. If the primary account holder, including non-borrowing spouses, is not another borrower on the transaction and the credit report shows any of the following characteristics, it may indicate the report is not an accurate reflection of the borrower s credit profile therefore rendering the credit score and the AUS findings invalid: There is a significant difference in credit utilization between the authorized user accounts and primary credit lines. There is a significant difference when comparing the late payments of the authorized user accounts to the primary credit lines. The credit limits on authorized user accounts are significantly higher when compared to the primary credit lines. SNMC Page 2 March 3, 2011

3 3.3-B Credit Analysis (cont d) 3.3-B3 Disputed Accounts- DU approve/eligible loans Conventional: Underwriters are responsible for ensuring the accuracy of the credit report used by DU in its underwriting analysis. When erroneous or disputed accounts are identified on the DU Findings Report, underwriters must verify the accuracy of the disputed trade line(s), determine if the trade line(s) belong to the borrower and confirm the accuracy of the payment history. This is to ensure the accuracy of the credit report used by DU in the underwriting analysis. Use one of the following options: If the trade line does not belong to the borrower, or the reported payment history is inaccurate, underwriters must obtain written documentation satisfying the DU condition and include it in the loan file. Under these circumstances, when the information is validated, DU may require no further action. If the trade line does belong to the borrower and the reported payment history is accurate, the disputed trade line(s) must be considered in the credit risk assessment. To ensure the disputed trade line is considered, the underwriter must obtain a new credit report with the trade line(s) no longer reported as in dispute and resubmit the loan case file to DU. DU will no longer show the condition regarding the disputed account. FHA: If the credit report reveals the borrower is disputing any credit accounts or public records, the loan must be downgraded to Refer and be manually underwritten. 3.3-B4 Fraud Alert Messages When a message is present on the credit report that indicates the borrower has been a victim of fraud and requires contact before granting credit, the branch must accommodate that request. See the forms section for SNMC Hawk Alert Credit Statement Certification for guidance. While the form is not required it is recommended. The borrower must be contacted at the phone number provided on the credit report and the conversation must be documented in the file. 3.3-B5 Inquiries Multiple recent inquiries should be examined to determine if borrowers are in danger of becoming overextended and/or have additional property acquisitions. The factors that should be considered in conjunction with an explanation from the borrower for the inquiries are the borrower s payment experience, the type of credit being sought, total amount of credit outstanding and the credit utilization reflected on the credit report. 3.3-B6 OFAC Procedures The following procedures should be followed if you receive an OFAC match on your FraudGuard or credit report: the loan number and borrower name to or They will complete the necessary research to determine if the borrower is an exact match to the OFAC SDN list and respond via . In order to document SNMC compliance with OFAC procedures, the response should be printed and scanned into PaperVision with the internal docs for the loan. 3.3-B7 Omitted accounts Supporting documentation is required when a credit report liability with a balance greater than zero is omitted from the loan application. SNMC Page 3 March 3, 2011

4 3.3-B Credit Analysis (cont d) 3.3-B8 Verification of Mortgage/Rent Verification of Mortgage Evidence of timely repayment is required on all outstanding mortgages. Any one of the following is acceptable for verification of mortgage history: 3-Repository Merged In-File Credit Report covering the last 12 months. When mortgage history is not on the credit report, obtain 12 months cancelled checks. Borrower s bank statements for the last 12 months and verification in the form of a payment coupon or a voucher showing the amount of the payment and date due. A standard Mortgage Verification (VOM) or loan payment history from the servicer of the current loan Verification of Rent In addition to the circumstances where verification of housing history is required, there are many instances where obtaining verification of rental history would be prudent underwriting such as increased housing payment/payment shock, limited credit, etc. Verification of Mortgage/Rental Payment History Documentation Requirements: The statement must be computer-generated or typed. Must identify the issuing company. Must clearly identify the borrower and mortgage. Show the total mortgage payment due and due date of each payment. Show a 12-month history of the dates when payments were applied. Show the current outstanding balance. Cancelled checks must be legible and be copied front and back. Show the bank endorsement and the date of the endorsement. Identify the services or landlord payee. If the source of rental housing payment verification is a party other than a professional management company, 12 months cancelled checks are required. This documentation must be in the following forms: Direct written verification from landlord or servicer Information shown on the credit report The most recent 12 months of cancelled checks or receipts for payment of the rent/mortgage SNMC Page 4 March 3, 2011

5 3.3-C Derogatory or Adverse Credit The following general guidelines apply; always refer to individual loan programs for more restrictive requirements. When significant adverse credit is identified, documentation must be provided to evidence whether the information is due to extenuating circumstances or financial mismanagement, and that acceptable credit history has been re-established. Significant Adverse Information Adverse or derogatory credit information is likely to be significant if: There are several accounts showing recent delinquencies, especially 60- or 90-day late payments. The number and size of delinquent accounts are large in relation to the overall credit. There are multiple episodes extending over a period of time or involving large debts or collection of payments These conditions should be evaluated to determine whether the problems were due to the borrower s disregard for their financial obligations, financial mismanagement, or circumstances beyond the borrower s control. Underwriter should address any major derogatory credit within the last two years and possibly obtain a sufficient written explanation from the borrower. Note: VA and FHA Refer recommendations require an explanation for all major indications of derogatory credit and any minor indications within the past two years. Extenuating Circumstances Borrowers who experienced financial difficulties due to extenuating circumstances beyond control of the borrower, such as a serious illness or death of a wage earner, may present less of a risk than what is indicated by their credit score. If extenuating circumstances are used to determine that the borrower s credit is acceptable despite having adverse or derogatory information, the underwriter must confirm that the borrowers have reestablished acceptable credit. Financial Mismanagement It is not easy to substantiate that those borrowers whose derogatory or adverse credit information is due to financial mismanagement will present an acceptable credit risk. This generally takes a longer, and more convincing, credit re-establishment period. Major Derogatory Credit The credit history for the last seven years should be reviewed to determine whether there are any major indications of derogatory credit, such as un-discharged debts, judgments, bankruptcy, etc. Any litigation involving the borrower, including bankruptcy, foreclosure, deed-in-lieu, pre-foreclosure, short sale, judgments, tax liens, collection accounts, and charge-offs must be evaluated separately and meet the specific loan program guidelines. Any housing history showing any 30-day late payment in the last 12- month period is also treated as major derogatory credit. SNMC Page 5 March 3, 2011

6 3.3-C Derogatory or Adverse Credit (cont d) Re-establishing a Credit Record The following are the standard requirements for re-establishing an acceptable credit record. Certain loan programs may contain a specific criterion that is more restrictive and/or different from these standard guidelines. Conventional loans: New Public Records for Bankruptcies, Judgments, or Collections: Must have none after date of discharge or completion of plan. Housing History: Must have none 60 days or more past due payments after discharge or completion of plan. No more than two during most recent 24 month period Past due payments: All borrowers existing credit obligations must be current at the time of application Borrower s Written Statement Must: Outline the cause of the financial difficulties, and State that the cause was beyond the borrower's control, and State the difficulties are not likely to recur. Re-established Credit Requirements After Bankruptcy or Foreclosure: Must have at least 4 active references that must include: One traditional credit reference (tradeline) or nontraditional reference for at least 24 months. The payment references may include an account opened prior to the derogatory information, and must include: o o 3.3-C1 Bankruptcy One housing-related reference for at least 24 months, and The credit report must not contain multiple revolving accounts with balances at maximum limits that would indicate that the borrower has excessive obligations that could adversely affect the borrower s ability to repay the mortgage obligation. Chapter 7 Bankruptcy Conventional loans: Extenuating circumstances or Financial Mismanagement: Time elapsed must be 48 months or greater from either the discharge or dismissal date. FHA/VA loans: Time elapsed must be 24 months or greater from either discharge or dismissal date. Time less than 24 months but greater than 12 months may be acceptable on a case by case basis, will require documented extenuating circumstances and significant compensating factors (see the section 4.C.2.g for more details). In any circumstance the borrower must have re-established good credit or chosen not to incur new credit obligations and document the borrower s current situation is not likely to recur. SNMC Page 6 March 3, 2011

7 3.3-C Derogatory or Adverse Credit (cont d) 3.3-C1 Bankruptcy (cont d) Chapter 13 Bankruptcy Conventional loans: For extenuating circumstances time elapsed must be 24 months or greater from either the discharge or dismissal date. For financial mismanagement time elapsed must be 48 months or greater from discharge or dismissal date. FHA/VA loans: A chapter 13 bankruptcy does not disqualify a borrower, provide the following: One year of the payout period under the bankruptcy has elapsed and The borrower s payment performance has been satisfactory and all required payments have been on time The borrower must receive written permission from the court to enter into the mortgage transaction. Multiple Bankruptcy Filings within the Last Seven Years Conventional loans: Extenuating circumstances: Time elapsed must be 36 months or greater from the most recent discharge or dismissal date. The most recent bankruptcy must have been the result of extenuating circumstances. Financial mismanagement: Time elapsed must be 60 months or greater from most recent discharge or dismissal date. 3.3-C2 Collection accounts/charge offs Collections and charge offs indicate a borrower s regard for credit obligations and must be considered in the creditworthiness analysis In certain cases, collection and charge-off accounts will be reflected in amounts that have no material effect on the priority of the lien; therefore, collection or charge-off accounts do not have to necessarily be paid off at or prior to closing as a condition for mortgage approval on FHA/VA loans. They may however be required to be paid at the underwriter discretion. Collections or charge-offs do not have to be paid at or before closing for conventional loans if they meet the following guidelines: Conventional loans (DU): Occupancy type Primary residences (1 unit) Primary residence (2-4 units) Second home (1-unit) Investment properties Maximum Allowable Amount See note below* $5,000 per individual item or in aggregate $5,000 per individual item or in aggregate $ per individual account or $1,000 in aggregate *Desktop Underwriter: For 1-unit, owner-occupied properties underwritten through DU, borrowers will not be required to pay off outstanding collections regardless of amount provided the collection will not threaten the Fannie Mae first-lien position. SNMC Page 7 March 3, 2011

8 3.3-C Derogatory or Adverse Credit (cont d) 3.3-C2 Collection accounts/charge offs (cont d) DU must return the following message: The following collection and charge-off accounts are shown on the credit report. These accounts do not need to be paid off prior to or at closing if the lender is able to confirm that the accounts pose no threat to the Fannie Mae first-mortgage lien. If payoff is required, funds sufficient to settle the account(s) must be verified and documented. Loan Prospector: Refer to the underwriting certificate for payoff requirements. 3.3-C3 Credit Counseling Participation in credit counseling or completion of the same should not be the single determining factor in the credit decision. If a valid credit score is obtained and the credit history meets all the requirements of the individual loan program, no further credit evaluation is required. FHA/VA loans: FHA requirements are at least one year of the pay-out period has elapsed under the plan and the borrower s payment performance has been satisfactory (i.e., all required payments made on time). In addition, the borrower must receive permission from the counseling agency to enter into the mortgage transaction. 3.3-C4 Foreclosure/Pre-foreclosure Foreclosure Conventional loans: The requirement for time elapsed after completion of foreclosure is 7 years for all loans, regardless of AUS. FHA loans: Time elapsed must be 36 months or greater from foreclosure or deed in lieu completion date. An exception may be granted to the 36 month requirement if the foreclosure was result of documented extenuating circumstances that were beyond control of the borrower such as serious illness or death of a wage earner (see HUD handbook section 4.C.2.f for more information). VA loans: See VA Lender Handbook for details Deed in lieu of foreclosure/pre-foreclosure/short sale Deed-in-lieu is defined as a transfer of title from a delinquent borrower to the lender in satisfaction of the mortgage debt to avoid foreclosure. The terms short sale and pre-foreclosure sale have the same meaning. The sale of a property in lieu of a foreclosure, resulting in the payoff of less than the amount owed, which was pre-approved by the servicer. The required waiting period after the borrower has experienced a pre-foreclosure event (Deed in lieu, pre-foreclosure sale, short sale) is the following: 2 years- with a maximum 80% LTV 4 years- with a maximum 90% LTV 7 years- can follow standard product/program guidelines SNMC Page 8 March 3, 2011

9 3.3-C Derogatory or Adverse Credit (cont d) 3.3-C4 Foreclosure/Pre-foreclosure (cont d) Due to the fact the pre-foreclosure event cannot be identified in the credit report data by the AUS systems at this time, underwriters are required to determine if there is a pre-foreclosure event during their review of the credit report and manually apply these policies. The underwriter must complete analysis fully detailing that the applicant has re-established an acceptable credit history. Re-established Credit Requirements Re-established credit requirements after any major derogatory event will be as follows: The loan received as Approve or Accept from the AUS The borrower meets traditional credit history requirements (thin credit files are not acceptable) The waiting periods have been fulfilled All existing credit obligations must be current at the time of application No more than two 30-day late payments on any installment or revolving accounts in the most recent 24 months No 60-day late payments in the derogatory event waiting period No past due housing payments allowed in the derogatory event waiting period No new public records for bankruptcies, judgments, or collections in the derogatory event waiting period. 3.3-C5 Judgments/Tax liens Judgments and Tax liens, as well as any other derogatory items appearing in the title policy (for example, delinquent taxes, and mechanics liens) must be paid/released. 3.3-C6 Restructured or Short Payoff Loans A restructured or short payoff loan is any mortgage loan in which the terms of the original transaction have been changed, even on a current mortgage, resulting in either the absolute forgiveness of debt or a restructure of debt through either a modification of the original loan or origination of a new loan Restructured loans result in: Forgiveness of a portion on principal and/or interest on either the first or second mortgage Application of a principal curtailment by or on behalf of the investor to simulate principal forgiveness Conversion of any portion of the original mortgage debt to a soft subordinate mortgage Conversion of any portion of the original mortgage debt from secured to unsecured To assist in identifying restructured or short payoffs on a property, the following scenarios are a few common indicators that the loan may be a short payoff: The new loan amount is less than the current balance The payoff amount on the final HUD-1 is less than the current balance The payoff demand reflects a shortfall and uses the word forgiven or payoff bonus SNMC Page 9 March 3, 2011

10 3.3-C Derogatory or Adverse Credit (cont d) 3.3-C6 Restructured or Short Payoff Loans (cont d) If the borrower is completing a short payoff or has had a previous loan with a short payoff this is considered a significant derogatory credit. A short payoff or restructured loan would be treated similar to bankruptcy, foreclosure, or deed-in-lieu of foreclosure and is subject to the same waiting period before new financing is approved. If the significant derogatory can be attributed to extenuating circumstances at least two years must have elapsed since the incident was completed. 3.3-D Fannie Mae s Loan Quality Initiative (LQI) The following guidelines are effective for loan applications taken on or after June 1, These changes are in response to Fannie Mae s announcement which purpose is to enhance loan quality. Since this is a Fannie Mae directive it applies to Conventional Loans only (LDP & GSA still required on FHA loans). Borrower Identity and Social Security Verification The file must provide documentation to confirm each borrower s identity prior to closing and verify that each borrower has a valid Social Security number. For loans that receive Social Security number verification messages the following action is required: Verify the SSN was correctly entered into the data fields submitted to DU, or Verify the accuracy of the SSN with the Social Security Administration per FNMA requirements, and Correct the DU data input and resubmit the loan case file to DU. SNMC will not allow loans with a DU recommendation that receives the SSN verification message. This issue will need to be resolved and clear DU findings obtained prior to closing. Undisclosed Liabilities The file must provide evidence that all debts incurred or closed by the borrower, up to and concurrent with closing are disclosed on the final 1003 and evaluated in qualifying the borrower for the loan. Any inquiries on the credit report must be addressed individually, by the borrower, both to purpose and outcome of inquiry. Generic explanation letters are not acceptable. In addition, the underwriter must obtain within 7 days of closing, a credit supplement or direct verification from each creditor shown as an inquiry on the credit report, to verify no new credit was extended. Our current policy of re-pulling MERS prior to funding is still in effect. Due diligence should be exercised by the underwriter in evaluating the credit file. Age of the credit report and/or individual trade lines should be reviewed and considered. A new credit report should be ordered if there is any indication of undisclosed credit. Particular attention should be paid to any large deposits that could be the result of borrowed funds. When undisclosed liabilities are found, the loan must be re-underwritten and the file reviewed for misrepresentation. SNMC Page 10 March 3, 2011

11 3.3-D Fannie Mae s Loan Quality Initiative (LQI) (cont d) Occupancy Requirements If an occupancy verification message appears in the DU findings, or if the underwriter questions occupancy based on the file review, documentation must be provided to confirm the applicant s intent to occupy the property as their principal residence. Possible scenarios: If the transaction is the purchase of a principal residence, but a recent previous mortgage transaction was also the purchase of a principal residence within the previous 12 months, the borrower must provide some reasonable documentation to justify the new transaction. If the transaction is a refinance of a principal residence but the loan application contains a different current address for the borrower, the borrower must provide additional documentation to justify the conflicting address information. Validation of Qualified Parties Loans originated, underwritten, or serviced by individuals or companies that are on the Federal General Services Administration s (GSA) Excluded Party List or HUD s Limited Denial of Participation (LDP) list are ineligible. This includes management personnel and any other person or company that has substantive control over the transaction. This is now a requirement for all Conventional loans, not just FHA. If any company or individual is found to be on either list, the loan is not eligible for funding. A copy of the appropriate list that has been checked should be placed in the loan file. The following parties must be checked on all loans, both government and conventional: Borrowers Co-Borrowers Sellers Real Estate Agents-Listing and Selling Loan Officer Broker Title Company Escrow Company Appraiser Loan Processor and Loan Processing Company if applicable SNMC Page 11 March 3, 2011

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