| 3. Creditworthiness
Credit Analysis:
Another very important part of the underwriting process is determining the creditworthiness of the borrower. Loan underwriters review the borrower’s credit report to find evidence of debt repayment behavior. Some of the important areas that are reviewed are:
Past and existing mortgage debt:
The past repayment history on mortgage debt can be a good indication of a borrowers attitude toward mortgage obligations. A good payment history on mortgage debt is very important in the credit analysis.Generally, payments received 30 days past the due date are reflected in the credit report as late. Lenders vary in strictness, and some may not allow any late mortgage payments, while others will allow 1 or 2 in the last two years if there is a good explanation.
Installment and revolving credit:
Other items on the credit report can also indicate a borrower’s attitude toward their financial obligations. Credit reports indicate the outstanding balance, payment amount, and terms of payment on the borrower’s revolving and installment debts. Underwriters review these credit obligations to determine the borrower’s patterns of credit use and repayment behavior. Revolving credit refers to department store credit and bank credit cards. Installment credit refers to longer term credit with structured payment plans, such as car loans. Generally, underwriters are not concerned over isolated and minor slow payments indicated on the credit report. They look for an overall profile of the applicants attitude towards their financial obligations.
Collections, repossession, foreclosures and bankruptcies:
Credit reports also indicate public records such as collections, repossessions, foreclosures, and bankruptcies. Though these items may indicate past credit problems, they sometimes have valid explanations. Underwriters may require a letter of explanation on items noted in the public records. Many times consumers have re-established credit and have an excellent payment history on their current obligations. It is important to forewarn the lender if there is an item on your credit report that requires explanation. Provide that explanation in detail so that the underwriter is comfortable with it.
Some lenders will approve applicants that have previously been bankrupt provided they have since re-established a good credit history and the cause of the bankruptcy was reasonably not the fault of poor credit management on the part of the bankrupt. CMHC will, on a case by case basis, approve applicants that have been bankrupt provided two years has passed since they were discharged. |
