New Guidelines Regarding Credit History,
Authorized Users and Mortgage Approval
Recently, Freddie Mac updated their underwriting guidelines, via its "Bulletin" from September 19, 2018 ...
One of the key points documented in this Freddie Mac Bulletin related to Credit Reporting and specifically ... "AUTHORIZED User Accounts".
Before proceeding, it's important to know the definition and role of an Authorized User, as per the 3 major Credit Bureaus.
An "Authorized User" (as defined by Equifax) is:
In a nutshell, being an authorized credit card user means someone has authorized you to use their credit card account. If you’re added to a credit card account as an authorized user, you will receive a credit card in your name, linked to the primary account owner’s account, and you will be considered a secondary account holder.
While authorized users are considered account holders, they are not responsible for ensuring financial obligations to the credit card company are satisfied – meaning they don’t generally receive the account statement and aren’t legally responsible for paying the amounts due. That is the responsibility of the primary account holder. The primary account holder also receives the credit card statement.
For further info from Equifax regarding Authorized Users, click HERE.
In the world of credit reporting, it's come to light that some Borrowers are trying to enhance their own personal credit history by "jumping on" another person's (typically a spouse's or parents') credit line as an "Authorized User".
This action is commonly referred to as "Tradeline Rental". This Tradeline Rental is orchestrated by Credit Repair Companies ... and some Mortgage Originators ... in an attempt to boost credit scores for individuals/mortgage applicants.
Freddie Mac (Conventional Loans) has now issued a more restrictive and specific update on HOW a Lender's Underwriters must view these types of ratings on an applicant's Credit Report.
Depending on the results of the Automated Underwriting findings ... a Lender's Underwriter may now require that a Borrower/Applicant meet the following criteria/conditions listed below.
Note: The end goal is to allow Lender's Underwriters to consider and determine whether the usage of an "Authorized User Account" should be factored in an Applicant's overall Credit Analysis.
Freddie Mac has determined that the following requirements must be gathered, evidenced, and documented by the Lender for each Authorized User Account:
- Another Borrower on the Mortgage owns the Tradeline in question, or ...
- The Tradeline is owned by the Borrower's Spouse, or ...
- The Borrower has been making the payments on the Account for the last 12 months, or ...
- If the Lender's Underwriter is unable to document one of the above requirements for each Authorized User Account, the Lender may make the determination that the Authorized User Accounts have an insignificant impact on the Borrower's overall Credit History and the information on the Credit Report is representative of the Borrower's own credit reputation
- The Lender's Underwriter should base its determination on the number of the Borrower's own Tradelines ... as well as their Age, Type, Size, and the Payment History, as compared to the Authorized User Accounts
- The Lender's Underwriter must document its determination in the Mortgage file
This change offers an opportunity for Borrowers as it can and will matter in those cases where the Borrower has a limited Credit History or needs another "tradeline" to meet a Lender's/Underwriter's credit requirements. This new stance by Freddie Mac comes as a result of truly trying to define the "true" credit history of the Borrower.
In the case where the Borrower has a limited amount of credit, and when Private Mortgage Insurance is involved, this policy could be critical to the "allowance" of newly acquired Authorized User Accounts, especially in the attempt to "create" a second or third Tradeline in order to get Approval from a Lender and a Private Mortgage Insurance Company.
Changes within the industry happen with regularity. It's always important to choose an LO that remains educated and current ... fully knowledgeable with a proven track record of experience.
But financing scenarios that include Authorized Users, Tradelines, and PMI especially point out the real need for Borrowers taking ample time to conduct a thorough search for their lender. In such cases, an LO must possess a thorough understanding of this new Freddie Mac change, as its correct implementation could mean the difference between finding underwriting success or failure.
In New Lenox, Will County, and throughout the Chicagoland - IL/WI area, please don't hesitate to reach out to me with your mortgage questions or for assistance ...
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