Written By: Glenn Michaels, Op-Ed Writer
When I first began underwriting in 1972 there was no such thing as credit scores. Underwriters used their best judgment when reviewing a credit report and after evaluating the history of the credit they made a decision whether or not to grant credit.
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Now having credit scores, a lot of the guess work has been taken away. For a long while underwriters took the position “the score is the score” and did not even review the overall credit profile.
Today, many people know how to increase their credit scores just before shopping for credit. In my eyes, “the score is no longer the score” due to the manipulation of the credit report and score.
Credit scoring began in the 1980’s and was used almost exclusively in the subprime area of mortgage lending. Almost every lender wanted us to use the middle score or the lowest score if only two credit scores came up. During the subprime era there was even one subprime lender that allowed underwriting of a loan using the highest credit score.
The three main credit repositories, Trans Union, Equifax and Experian score everyone from a low of 345 to a high of 845 plus or minus a few points in either direction. Now everyone must use the middle score if three scores come up or the lowest score if two scores come up. If there is more than one borrower then you will use the lowest score determine for each borrower.
The original intent of using credit scores was eliminate cultural bias and to eliminate credit judgments. The score is what you use in reviewing the credit.
FHA for a long time advised underwriters to review the overall pattern and history of paying a person’s credit and the scores were secondary. When FHA allowed Automated Underwriting with the TOTAL Scorecard credit scoring became more important. The FHA allows credit scores from 500 and up. Ten percent down if the score is lower than 580 but not lower than 500, maximum financing if
Recently, in 2014, HUD put out regulations and guidance whereby underwriters can do more manual underwriting where the scores were less important. Now underwriting for borrowers that are manually underwritten may or may not have credit scores at all.
Scoring and automated underwriting is more “one size fits all” when you cannot really do this.
Things happen to people that affects their credit and their credit scores.
The manual underwriting can bypass the lack of credit or lower credit scores based on the situation(s) that took place. An important element in underwriting is the knowledge that the situation that caused the borrowers lower credit scores has been resolved. The underwriter must use their judgment in determining whether or not to pass the loan.
The scores still involve “risk based” pricing. The lower the credit score or the lack of credit may increase the price of the loan. Unfortunately the secondary market has not forgiven a borrower for past problems.
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There are numerous ways to increase a borrower’s credit score and all borrowers should work on that in order to obtain a better “risk based” pricing and better underwriting, if possible.
About The Author
Glenn Michaels - As an op-ed writer, Glenn Michaels is a mortgage underwriting instructor for CampusUnderwriter (www.MortgageUnderwriter.org). As a BBA & FHA DE Underwriter, Glenn is a Pace University graduate who also graduated from New York University’s School of Mortgage Finance. Glenn has conducted numerous training classes and has worked in the mortgage banking industry for 38 years.
