Understanding Manual Underwriting Credit Requirements
When your loan goes to manual underwriting, the underwriter evaluates your credit reputation differently than automated systems. They look at your entire credit picture, not just a score. This process requires specific documentation and follows strict guidelines about what makes credit acceptable.
The foundation starts with establishing you have enough credit history. You need at least three tradelines — these are credit accounts like credit cards, auto loans, or mortgages that appear on your credit report. If you don't have three tradelines, you can use four non-credit payment references instead.
Say you're a recent college graduate with only two credit cards. You could supplement with non-credit references like rent payments, utility bills, cell phone payments, or even documented savings account deposits. Each non-credit reference must show at least 12 months of payment history.
Required Documentation for Credit Evaluation
Your lender needs comprehensive documentation to verify your credit reputation. The core requirements include Form 65 (your loan application), credit reports from all three bureaus, and direct verification of any accounts not showing on your credit report.
For tradelines, the lender can use what appears on your credit report or obtain direct verification from creditors. Direct verification requires specific information: creditor name and address, your name as the payor, account details, payment amounts, outstanding balances, and a detailed payment history showing exactly how many times you were late.
Non-credit payment references need similar documentation. If you're using rent payments, the lender needs your lease agreement plus 12 months of canceled checks, bank statements showing rent payments, or receipts from your landlord. Generic reference letters won't work — the documentation must show specific payment amounts, dates, and any late payments.
Why These Rules Exist
Fannie Mae requires this detailed credit evaluation because manual underwriting handles loans that don't fit standard automated approval criteria. These borrowers often have unique circumstances — limited credit history, recent credit problems, or complex financial situations.
The three-tradeline minimum exists because FICO scores become unreliable with fewer accounts. A score based on just one or two accounts doesn't accurately predict future payment behavior. The 12-month requirement for non-credit references ensures the lender sees a meaningful pattern of payment behavior, not just a few months of good payments.
Housing payment history gets special weight because it most closely resembles mortgage payments. Your track record paying rent or a previous mortgage tells the underwriter more about mortgage risk than how you handle a credit card.
Common Problems and Complications
The biggest trap involves authorized user accounts. If you're an authorized user on someone else's credit card, that account might inflate your FICO score artificially. The lender must either document that you've been making the payments for 12 months, that the account belongs to your spouse, or that another borrower on the loan owns the account. Otherwise, they can't use that FICO score.
Recent derogatory credit creates major complications. Any significant negative information within the past two years makes your credit reputation unacceptable, period. This includes multiple late payments, collections, or any housing payment more than 30 days late in the past year.
Credit score discrepancies cause delays. If your credit report shows different information than what was used to calculate your FICO score, the lender might have to disregard that score entirely. They need written documentation from the credit bureau confirming any errors before they can proceed.
Evaluating Derogatory Credit Information
When you have negative credit history, the underwriter must determine if it's "significant." Some derogatory information automatically qualifies as significant: bankruptcy, foreclosure, short sale, multiple 60-day late payments, or more than one 30-day late housing payment in 12 months.
For other negative information, the underwriter weighs factors like timing, frequency, and the size of affected accounts. A single 30-day late payment on a small credit card from three years ago probably isn't significant. Multiple recent late payments on large accounts definitely are.
If you have significant derogatory credit older than two years, you need either extenuating circumstances or a long recovery period. Extenuating circumstances are events beyond your control — job loss due to company closure, serious illness, or natural disaster. You need third-party documentation proving these circumstances and showing you've reestablished good credit since.
Recovery Periods and Restrictions
Different types of credit problems require different recovery periods. Bankruptcy requires 24 months from discharge if caused by extenuating circumstances, 48 months if due to financial mismanagement. Foreclosure requires 36 months for extenuating circumstances, 84 months for mismanagement.
These aren't just waiting periods — you must actively reestablish credit during this time. The underwriter needs evidence you've managed credit responsibly since the negative event. Simply avoiding credit doesn't count as reestablishment.
Previous foreclosure, short sale, or deed-in-lieu creates additional restrictions. Your new loan must be either a purchase with maximum 90% loan-to-value ratio or a no-cash-out refinance. Cash-out refinances aren't allowed regardless of how much time has passed.
Special Considerations for FICO Scores
When you have usable FICO scores, the underwriter uses the middle score if you have three, or the lower score if you have two. This becomes your "Underwriting Score." For multiple borrowers, they typically use the lowest Underwriting Score as the "Indicator Score" for the entire loan.
FICO reason codes guide the underwriter's analysis. These codes explain why your score isn't higher and highlight areas needing attention. If reason codes indicate payment problems, the underwriter looks for explanations or offsets in your file.
You can't use certain factors to offset credit weaknesses because they're already built into your FICO score. Recent debt payoffs, the age of negative information, or the mix of account types won't help your case — the score already considers these factors.
Documentation Requirements
The underwriter must document their credit analysis on Form 1077 or similar summary. This includes identifying which FICO scores were used, explaining any scores that were disregarded, and documenting the conclusion that your credit reputation is acceptable.
For significant derogatory credit, additional documentation is required. You need a written explanation of what caused the problems, third-party verification of extenuating circumstances if applicable, and evidence of credit reestablishment. The underwriter's analysis must connect your explanation to the documentation and reach a reasonable conclusion about your creditworthiness.
The file must also include verification of any debts not showing on your credit report and explanations for any inconsistencies between your application and credit documentation.
References
For the official guidelines, see 5202.1: Credit assessment for Manually Underwritten Mortgages in the Fannie Mae Selling Guide.
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Original Freddie Mac Guideline Text
This section contains requirements related to:
Establishing Borrower’s credit reputation
Documenting Borrower’s credit reputation
Evaluating Borrower’s credit reputation
Adverse or derogatory credit information
Evaluating other credit information
Documenting and delivering Underwriting Scores and Indicator Scores
Manually Underwritten Mortgages must meet the requirements of this chapter and the Guide.
(a)
Establishing Borrower’s credit reputation
To establish an acceptable credit reputation, there must be at least a minimum amount of credit history available as described below. There may be situations in which a credit history of short duration is sufficient to demonstrate an acceptable reputation. A credit history of short duration adds a layer of risk that must be considered in evaluating the Borrower’s credit reputation.
(i)
Minimum number of payment references
At least one Borrower whose income or assets are used for qualification must have a minimum number of payment references consisting of:
At least three Tradelines, whether or not on the credit report, or
If a Borrower does not have three Tradelines, at least four Noncredit Payment References or a total of four Tradelines and Noncredit Payment References
A Tradeline for an account for which the Borrower is not the primary account holder but is an authorized user may be considered a Borrower’s Tradeline if the Seller maintains in the Mortgage file documentation that evidences at least one of the following:
Another Borrower on the Mortgage owns the Tradeline in question
The Tradeline is owned by the Borrower’s spouse
The Borrower has been making the payments on the account for the last 12 months and the monthly payment reported on the Borrower’s credit report is included in the monthly debt payment-to-income (DTI) ratio
When a permanent or nonpermanent resident alien Borrower has established the minimum number of payment references required above in the United States, a U.S. credit history may be supplemented with a credit history from a foreign country to establish an acceptable credit reputation.
Documentation from a foreign country must meet all applicable Guide documentation requirements, including:
Additional Guide provisions related to foreign documentation
Guide section
General requirements for verification documents
(ii)
Noncredit Payment References
A Noncredit Payment Reference must have existed for at least 12 months to be used to establish a minimum payment history. A Borrower with a credit reputation established using only Noncredit Payment References adds an additional layer of risk that must be considered by the Seller. In addition, when the credit reputation for all Borrowers is established using only Noncredit Payment References, at least one Borrower must participate in a homeownership education program before the Note Date or the Effective Date of Permanent Financing for Construction to Permanent Mortgages and Renovation Mortgages. See
Section 5103.4
for requirements related to homeownership education.
When the Borrower has a housing payment history, the Seller must verify both current and prior housing payment histories for no less than the most recent 12 months (or length of housing payment history if less than 12 months) in accordance with
Section 5202.1(b)
.
Documented payments of a voluntary nature, such as deposits to a savings account, contributions to a payroll savings plan or contributions to a stock purchase plan of at least 12 months, may be included as one of the Noncredit Payment References if the history shows periodic deposits (at least quarterly) resulting in a growing balance over the year.
(b)
Documenting Borrower’s credit reputation
(i)
Required documentation
The Seller is required to document the Borrower’s credit reputation and the Seller’s determination that the Borrower’s credit reputation is acceptable. Although the documentation necessary to establish an acceptable credit reputation may vary, the documentation in the Mortgage file must clearly demonstrate the Borrower met his or her obligations over an extended period of time.
To document the Borrower’s credit reputation, the Seller must use the following:
Form 65, Uniform Residential Loan Application
The credit reports
For Caution Mortgages, the Feedback Certificate
Any direct verification of payment histories
An underwriting summary such as
Form 1077, Uniform Underwriting and Transmittal Summary
Additional documentation may be required depending on the Borrower’s credit history
The Seller must first document the Borrower’s existing credit history by documenting a history of payments made by the Borrower through the credit reporting process as detailed in
Section 5203.1
and/or by direct verification.
If the credit report does not include a reference for each significant open debt, including housing debt, listed on the Mortgage application, the Seller must obtain a separate written verification for each unreported debt. Accounts listed on the credit report as “will rate by mail only” or “need written authorization” also require separate verification by the Seller.
The Seller must document in the Mortgage file and describe on
Form 1077
or another document in the Mortgage file:
Any additional risks uncovered during the evaluation of the credit history
The Seller’s analysis and conclusion that the Borrower’s credit reputation is acceptable
The documents used to establish the Borrower’s credit history must be consistent with each other and with the Borrower information found on the Mortgage application. The Mortgage file must also include any supporting documentation necessary to address derogatory information or other risks identified by other sources.
When underwriting with Credit Scores, the Seller must identify on
Form 1077
, or another document in the Mortgage file, the Credit Score selected for each Borrower and the process used to select that Credit Score from among all Credit Scores received for that Borrower. An explanation for any Credit Scores found to be unusable due to an insufficient number of Tradelines or inaccurate information should also be included.
(ii)
Documentation of Tradelines and Noncredit Payment References
Tradelines and Noncredit Payment References may appear on a credit report meeting the credit report requirements of
Section 5203.1
, or the Seller may obtain a direct verification from the creditor or other acceptable documentation of payment history meeting the requirements of this section.
If the verification of a Noncredit Payment Reference on the credit report or direct verification is provided by a source other than a professional business, the Mortgage file must also include other documentation supporting the payment history (e.g., canceled checks, depository statements, documentation from a third-party money transfer application or service or receipts issued by the creditor), subject to requirements below.
(A)
Direct verification
A direct verification may be either a completed verification form or a computer-generated payment history obtained by the Seller directly from the creditor and signed by the individual providing the verification.
Direct verifications must contain sufficient information to establish all of the following:
The name of the payor
The name and title of the individual providing the credit reference
The account number, if applicable
The nature of the obligation (e.g., rent, utilities, payment for purchases, insurance)
The highest credit balance, if applicable
The outstanding balance
The current and historical status of the account. The completed verification form must indicate the number of times and duration of times past due. The historical account status format should be “0 x 30, 0 x 60, 0 x 90 days” late. However, alternative formats are acceptable as long as the meaning is clear. Statements such as “current,” “as agreed” or “satisfactory” are not acceptable by themselves because they are too vague.
For a housing payment history, age of the reference if the length of housing payment history is less than 12 months
General reference letters without the above information are not sufficient documentation for establishing an acceptable credit reputation.
(B)
Other acceptable documentation
In lieu of a direct verification from the creditor, the Seller may obtain canceled checks, receipts issued by the creditor in accordance with the requirements of
Section 5202.1(c)
below, documentation from a third-party money transfer application or service or depository account statements from the Borrower. The Mortgage file must also contain documentation that substantiates the terms of the debt repayment (e.g., a copy of a fully executed lease agreement for a rental verification).
The obtained documentation must contain sufficient information to establish all of the following:
The name of the payor
The nature of the obligation (e.g., rent, utilities, payment for purchases, insurance)
The highest credit balance, if applicable
The outstanding balance
The current and historical status of the account, including number of times past due and how many days past due
For a housing payment history, age of the reference if the length of housing payment history is less than 12 months
Documented payments of a voluntary nature, such as deposits to a savings account, contributions to a payroll savings plan or contributions to a stock purchase plan of at least 12 months may be included as one of the Noncredit Payment References if the history shows periodic deposits (at least quarterly) resulting in a growing balance over the year.
If a savings history is used as one of the Noncredit Payment References, the Mortgage file must contain documentation, such as depository account statements, that meet the asset eligibility and documentation requirements of
Section 5501.3(a)
.
For rental verification, in order to meet the documentation requirements of this subsection, the Seller must:
Obtain a copy of a fully executed lease agreement and either canceled checks, depository account statements, documentation from a third-party money transfer application service or receipts from the creditor for payments in cash in accordance with the requirements of this Guide chapter, and
Confirm that the Borrower has made timely payments in accordance with the terms of the lease for the most recent 12 months
(C)
Requirements for receipts
Receipts from the creditor are acceptable documentation only if the payments being verified were made in cash and there is no evidence in the Mortgage file that the payments were made by checks or direct bank transfers.
(c)
Evaluating Borrower’s credit reputation
The Borrower’s credit reputation must be evaluated by one of the following methods:
, manually underwriting with FICO
®
scores and reason codes and analyzing the information in each of the Borrower’s credit reports and other verifications as required by this section. When a minimum Indicator Score is required, it must be met or exceeded for the Mortgage to be eligible for sale to Freddie Mac.
For Borrowers without usable Credit Scores
, manually underwriting without FICO scores and analyzing all information contained in each of the Borrower’s credit reports and other verifications
(i)
Determining whether Credit Scores are usable
The Seller must determine that each Credit Score (FICO score) received is usable. For a FICO score to be usable, it must be based on sufficient, accurate information. Too little information, or information that is significantly inaccurate, makes the FICO score unusable for Mortgage underwriting. This is important both to ensure that the FICO score is adequately indicative of a Borrower’s credit reputation and to ensure fairness for Borrowers in using Credit Scores to evaluate their overall credit reputation.
(A)
Insufficient information
Although FICO scores may be generated if a consumer reporting agency (CRA)’s file includes only one Tradeline, the Seller must not use any FICO score based on fewer than three Tradelines.
Because a merged credit report or Residential Mortgage Credit Report may show more Tradelines than were included in the particular CRA’s file used to generate the FICO score, the Seller should request that the credit reporting company (CRC) indicate on the credit report the number of Tradelines that were used to create each FICO score.
Alternatively, the Seller may obtain the in-file report used to create each FICO score and use the in-file report to determine if the FICO score was based on at least three Tradelines.
(B)
Inaccurate information
If the CRC reports that the CRA file used to create a FICO score contains inaccurate information about a Borrower’s credit history, the Seller must determine if the inaccuracy is significant, and, if so, it must disregard that FICO score and explain the decision on
Form 1077
or another document in the Mortgage file. However, minor discrepancies in the balances owed or payment amounts on open accounts belonging to the Borrower are not to be considered significant. FICO scores based on information that includes minor discrepancies must not be disregarded.
The Seller must disregard FICO scores based on significant inaccuracies. Significant inaccuracies include:
Public records information on a bankruptcy, foreclosure, judgment or collection that does not belong to the Borrower
Delinquencies that are reported in error
One or more Tradelines that do not belong to the Borrower
Tradelines for accounts for which the Borrower is not the primary account holder but is listed as an authorized user (authorized user accounts). However, the Seller does not have to disregard the FICO score if the Seller obtains and retains evidence in the Mortgage file of at least one of the following for each authorized user account:
Another Borrower on the Mortgage owns the Tradeline in question
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 and the monthly payment, as reported on the Borrower’s credit report, is included in the monthly DTI ratio
If the Seller is unable to document one of the above three requirements for each authorized user account, the FICO score does not have to be disregarded if the Seller determines 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 Seller 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 Seller must document its determination on
Form 1077
or another document in the Mortgage file.
The Seller must not adjust the value of a FICO score because some information used to create the score is inaccurate. The Seller may obtain and use a different FICO score from another CRA if the score obtained from that CRA was not based on similar inaccurate information.
For each Mortgage that the Seller has determined the inaccurate information is significant, the Mortgage file must contain written documentation from the CRA or the creditor reporting the inaccurate information affirming the errors. In addition, the Seller is strongly encouraged to inform the Borrower that, pursuant to rights granted under the federal Fair Credit Reporting Act, the Borrower has a right to contact both the CRA from which the inaccurate FICO score was obtained and the furnisher of the inaccurate credit information to require the disputed credit information to be reinvestigated and corrected. The requirements of this paragraph do not apply to authorized user accounts.
(ii)
Underwriting with usable credit scores
The Seller must comply with the following requirements when the Borrower has usable Credit Scores.
(A)
Identifying and using the Underwriting Score for each Borrower
To use Credit Scores to underwrite the Borrower’s credit reputation, the Seller must select a single FICO score for each qualifying Borrower from the FICO scores that were received and determined to be usable as described above.
To identify the Underwriting Score, the Seller must use the middle/lower method:
Identifying the Underwriting Score for each Borrower
3
2
1
Example:
If the FICO scores are 660, 656 and 640, the single FICO score selected by the Seller would be 656. When there is a duplicate score, the Seller would select that score to be the Underwriting Score. If the FICO scores for a Borrower are 660, 660 and 640, the Seller would select 660.
Underwriting Scores are used to identify an Indicator Score for the Mortgage.
(B)
Identifying and using the Indicator Score for the Mortgage
For Borrowers with usable Credit Scores, Freddie Mac requires that an Indicator Score be identified and delivered for a Mortgage for reasons such as eligibility or pricing. The Indicator Score must be identified in accordance with any one of the three methods described in the table below and must be delivered in accordance with the requirements of
Section 5202.1(f)
. Freddie Mac prefers the Seller use one method for all of their Mortgages.
Freddie Mac recommends the Seller use the middle/lower then lowest method to identify an Indicator Score, as it is the most predictive of the overall credit reputation of the Mortgage.
Before the Seller can identify an Indicator Score, the Seller must identify the Underwriting Score for each qualifying Borrower as described above.
If a Borrower has no usable FICO score, and no Underwriting Score can be identified for that Borrower, the Seller may use the Underwriting Scores for the remaining Borrowers to identify the Indicator Score.
Identifying the Indicator Score for each Borrower
Middle/lower then lowest method
The lowest Underwriting Score.
Note: If there is only one qualifying Borrower, that Borrower’s Underwriting Score is the Indicator Score for the Mortgage.
Middle/lower then average method
The average value of all Underwriting Scores.
Average/average method
The average value of all Underwriting Scores, except that the Underwriting Score for each Borrower is the average value calculated from all usable FICO scores received for the Borrower.
The minimum Indicator Score requirements for Mortgages are included in the individual Guide chapters for the product or offerings and in
Exhibit 25, Mortgages with Risk Class and/or Minimum Indicator Score Requirements
, and must be met or exceeded for the Mortgage to be eligible for sale to Freddie Mac. Sellers should also review other Purchase Documents for additional Indicator Score requirements. For some Mortgages, a minimum Indicator Score is required to be eligible for sale to Freddie Mac. If no Borrower has a usable FICO score and an Indicator Score is required for the Mortgage to be eligible, there can be no Indicator Score for the Mortgage, and it is not eligible for sale to Freddie Mac.
An Indicator Score does not indicate that the Borrower’s credit reputation is acceptable. Even when the Indicator Score for the Mortgage exceeds the minimum required, the Seller must determine that each Borrower individually, and that all Borrowers collectively, have an acceptable credit reputation.
(C)
Additional requirements for Borrower's with usable Credit Scores
Because FICO scores reflect the information in the Borrower’s CRA credit file at the time the FICO score was created, a Seller underwriting with FICO scores will find much of the evaluation of the Borrower’s credit reputation is already reflected in the FICO score and accompanying reason codes.
The Seller must use reason codes to identify credit factors that need to be addressed in determining the Borrower has an acceptable credit reputation. The reason codes indicate the most important reasons why a FICO score is not higher. The Seller must document credit-related offsets for the risks indicated by the reason codes; for example, if the reason codes indicate nonpayment of obligations, the Seller may establish that the Borrower was unable to meet credit obligations because they experienced financial difficulties attributable to extenuating circumstances. (See
Section 5202.1(d)
for more information about adverse or derogatory credit information.)
Seller must not use the following factors as offsets for weaknesses in the Borrower’s credit reputation because they have already been considered in creating the FICO score:
The absence or age of derogatory information
The number/proportion of accounts paid as agreed versus delinquent
The types of accounts paid as agreed versus the types of accounts that are delinquent
Recent pay-down or consolidation of account balances by the Borrower
The length of the Borrower’s credit history
(iii)
Borrowers without usable Credit Scores
If the Borrower doesn’t have a usable Credit Score, the Mortgage may be manually underwritten using Noncredit Payment References, as described in this chapter, when it is:
A purchase transaction or “no cash-out” refinance
Secured by a 1- to 4-unit Primary Residence, and
(iv)
Additional requirements for evaluating Borrower credit reputation
An acceptable credit reputation is established by a history that, when viewed as a whole, evidences a Borrower’s willingness to make ongoing payments and ability to manage obligations as agreed.
The Seller must determine that each Borrower individually, and that all Borrowers collectively, have acceptable credit reputations. The acceptable credit reputation of one Borrower cannot be used to offset the unacceptable credit reputation of another.
When evaluating each Borrower’s credit reputation, the Seller must:
Review all of the credit documentation in the Mortgage file, including the credit reports and direct verifications, to determine the data is accurate and the documentation in the Mortgage file is consistent with the credit report;
Thoroughly review and evaluate the Borrower’s entire credit history, in accordance with the requirements of this section, with the exception of trended credit data, which must not be considered.
Note: Trended credit data is expanded credit information reflecting historical Tradeline data such as balances, scheduled payments and actual payments reported for each month over an extended period of time.
Evaluate the Borrower(s) overall credit reputation using the factors described in this section and those listed in the reason codes accompanying the FICO score, for Borrowers with usable Credit Scores;
Identify and document credit-related offsets for significant derogatory information included in the credit history, such as bankruptcy, foreclosure, short sale or recent late housing payments (see
);
After credit reputation is established, evaluate the overall layering of risk (see
); and
Document its evaluation and conclusion that the credit reputation is acceptable on
Form 1077
or on a separate document in the Mortgage file
In evaluating the Borrower’s credit reputation, the Seller must weigh the following factors in arriving at a conclusion that the Borrower’s credit reputation is acceptable:
The type and amount of credit outstanding
How long the Borrower has had credit
How the Borrower uses available credit, including revolving balances-to-limits
Recent changes in the number of open accounts or overall amount of credit outstanding
The payment history and status of all accounts
Any recent inquiries shown on the credit report
Any public record or collection items
If a Borrower’s credit history includes both Tradelines and Noncredit Payment References, the Seller must put more weight on the Tradelines when evaluating the Borrower’s credit reputation and cannot use Noncredit Payment References to offset derogatory credit in a Tradeline reference. If a Borrower’s credit history includes housing obligations (rental or Mortgage), the Seller should put more weight on how housing payments were made than non-housing payments but must not ignore any derogatory information in the credit history.
The Seller must also consider layering of risk in its evaluation of credit reputation. A stronger credit reputation may be required if either capacity or collateral is weak. (See
Sections 5102.1
and
5102.2(b)
for more information on how to evaluate the overall risk of the Mortgage using credit reputation, capacity and collateral.)
(d)
Adverse or derogatory credit information
Adverse credit information in and of itself does not mean the Borrower’s credit reputation is unacceptable. When there is adverse or derogatory information in the Borrower’s credit history, the Seller must establish whether the derogatory information is significant.
If the Borrower’s credit history includes significant adverse or derogatory credit within the
most recent two years
, the Borrower’s credit reputation must not be considered acceptable. For all other significant derogatory information, the Seller must document extenuating circumstances or conclude that it was due to financial mismanagement.
(i)
Establishing whether adverse or derogatory credit information is significant
Derogatory information must
always
be considered significant if any of the following exist:
The Mortgage is underwritten using FICO scores and at least two reason codes are related to nonpayment of obligations
There are several accounts showing recent late payments
There are multiple 60- or 90-day late payments
There is more than one 30-day late housing payment in the last 12 months
There are more than two 30-day or more than one 60-day late housing payments within the most recent two years
The number and size of the delinquent accounts are large in relation to the overall credit
There are multiple episodes of late payments extending over a period of time
The credit history shows derogatory credit information within the two most recent years combined with multiple revolving accounts with high balances-to-limits
The public record information reveals several occurrences of derogatory credit information, including judgments, tax liens and/or non-medical collection accounts
There is a bankruptcy, foreclosure, deed-in-lieu of foreclosure or short sale within the last seven years that is disclosed on a credit report, disclosed by the Borrower on
Form 65
or is evidenced by other documentation contained in the Mortgage file
When establishing whether other adverse or derogatory credit information is significant, the Seller must weigh the amount of derogatory information against the rest of the credit history and determine whether it is significant. When making this determination, the Seller should not ignore any derogatory credit but must give more weight to late housing payments and to derogatory information or late payments occurring within the past two years. Generally, the more recent the adverse or derogatory credit information, the more likely it is significant.
The Seller must consider all of the following:
The number, timing and extent of the adverse or derogatory credit information
The number, type and size of accounts with adverse or derogatory credit information
Public record information, such as judgments and non-medical collection accounts
Other characteristics listed in this section
Example:
A 30-day late housing payment has more weight than a 30-day late non-housing payment, and a non-medical collection account has more weight than a 30-day late payment on a revolving account.
Although there may be many situations involving derogatory credit information that are less clear, especially when disputes about obligations are involved, the derogatory credit information is not significant when it consists only of isolated late payments, even if several accounts show sporadic late payments, provided all of the following exist:
The late payments were not recent
The late payments did not extend beyond one month
The number and size of delinquent accounts is not large in relation to the overall credit
The credit history does not show multiple revolving accounts with high balances-to-limits or high overall utilization of revolving credit
All other credit has been paid as agreed
Timeshare loans are considered installment debts, regardless of how they are reported on the Borrower’s credit report; therefore, payments on timeshare loans are not considered housing payments for purposes of evaluating late housing payments as required above. Additionally, the foreclosure recovery time periods for reestablishment of credit below do not apply to timeshare loans in foreclosure.
If the Seller determines that the derogatory information is not significant, it must provide documentation supporting its conclusion in the Mortgage file.
(A)
Evaluating significant adverse or derogatory information caused by extenuating circumstances
Freddie Mac considers an extenuating circumstance to be a nonrecurring or isolated circumstance or set of circumstances that was beyond the Borrower’s control and that significantly reduced income and/or increased expenses and rendered the Borrower unable to repay obligations as agreed, resulting in significant adverse or derogatory credit information.
If the Borrower’s credit history includes significant adverse or derogatory credit within the most recent two years, even if it was caused by extenuating circumstances, the Borrower’s credit reputation cannot be considered acceptable.
When the Seller uses extenuating circumstances to justify that the Borrower’s credit reputation is acceptable despite significant adverse or derogatory information, the Seller must use third-party documentation to confirm the extenuating circumstances and that the Borrower has reestablished an acceptable credit reputation.
When the Seller determines that the Borrower’s credit reputation is acceptable despite significant adverse or derogatory information caused by extenuating circumstances, the Mortgage file must contain all of the following documentation:
A written statement from the Borrower, in the form of a signed letter or an e-mail directly from the Borrower, attributing the cause of the financial difficulties to outside factors beyond the Borrower’s control that are not ongoing and are unlikely to recur
Third-party documentation confirming that the events related by the Borrower in the explanation were an isolated occurrence and significantly reduced the Borrower’s income and/or increased expenses and rendered the Borrower unable to repay as agreed
Form 1077
or on a separate document in the Mortgage file, relating the Borrower’s explanation to the Mortgage file documentation and leading to a reasonable conclusion that:
The explanation is consistent with the adverse information reported and the other information in the Mortgage file
The events causing the financial difficulties were beyond the Borrower’s control, are not ongoing and are unlikely to recur; and
The Borrower has reestablished an acceptable credit reputation
Evidence on the credit report and other documentation in the Mortgage file of the length of time since completion of the significant derogatory event to the date of application (i.e., the recovery time period)
The following table contains the requirements for reestablishment of credit, including the minimum recovery time periods and, when applicable, additional requirements that must be met:
Requirements for the reestablishment of credit
Extenuating circumstances
Significant derogatory event: Foreclosure
36 months from the completion date
or
When foreclosure resulted from a Mortgage that was extinguished in Chapter 7 bankruptcy, the recovery time period for a Chapter 7 bankruptcy caused by extenuating circumstances may be applied and counted from the date of the bankruptcy discharge, provided that:
The Mortgage file includes documentation supporting that the foreclosure resulted from a Mortgage that was extinguished in the Chapter 7 bankruptcy
The foreclosure proceedings did not begin before the bankruptcy filing, and
The Mortgage was not reaffirmed through the bankruptcy
Additional requirements
Whenever a Borrower has had a previous foreclosure, the Mortgage must either be:
A purchase transaction Mortgage secured by a Primary Residence with a maximum loan-to-value (LTV)/total LTV (TLTV)/Home Equity Line of Credit (HELOC) TLTV (HTLTV) ratio of the lesser of 90% or the maximum LTV/TLTV/HTLTV ratio for the transaction, or
A “no cash-out” refinance Mortgage that meets the requirements of
Chapter 4301
Additionally, the Mortgage file must contain evidence of the completion of the foreclosure.
Significant derogatory event: Deed-in-lieu of foreclosure
24 months from the execution date
Additional requirements
Whenever a Borrower has had a previous deed-in-lieu of foreclosure the Mortgage must either be:
A purchase transaction Mortgage secured by a Primary Residence with a maximum LTV/TLTV/HTLTV ratio of the lesser of 90% or the maximum LTV/TLTV/HTLTV ratio for the transaction, or
A “no cash-out” refinance Mortgage that meets the requirements of
Chapter 4301
Additionally, the Mortgage file must contain evidence of the deed-in-lieu of foreclosure.
Significant derogatory event: Short sale
24 months from the completion date
Additional requirements
Whenever a Borrower has had a previous short sale within the last seven years, the Mortgage must either be:
A purchase transaction Mortgage secured by a Primary Residence with a maximum LTV/TLTV/HTLTV ratio of the lesser of 90% or the maximum LTV/TLTV/HTLTV ratio for the transaction, or
A “no cash-out” refinance Mortgage that meets the requirements of
Chapter 4301
Additionally, the Mortgage file must contain evidence of the short sale.
Significant derogatory event: Bankruptcy (all bankruptcy actions)
Recovery time period
24 months from the discharge or dismissal date
Additional requirements
Whenever a Borrower has had a bankruptcy within the last seven years, the Mortgage file must also contain:
Copies of the bankruptcy petition, schedule of debts and discharge or dismissal
Evidence to indicate that all debts not satisfied by the bankruptcy have been paid or are being paid
Any other evidence necessary to support the Seller’s determination that the Borrower has reestablished and maintained an acceptable credit reputation
Other significant adverse or derogatory credit information
Recovery time period
24 months from the most recent significant adverse or derogatory credit information
(B)
Evaluating significant adverse or derogatory information caused by financial mismanagement
If the Seller is unable to document extenuating circumstances in accordance with Freddie Mac’s requirements, then it must conclude that the problems were due to financial mismanagement.
Making a case that the Borrower is sufficiently willing to repay obligations when significant derogatory information was caused by financial mismanagement is very difficult. It will take a longer and more convincing reestablishment period to overcome derogatory information caused by financial mismanagement than would be needed if the Borrower had experienced financial difficulties due to extenuating circumstances.
When the Seller determines that the Borrower’s credit reputation is acceptable despite significant adverse or derogatory information caused by financial mismanagement, the Mortgage file must contain all of the following documentation:
Evidence that the Borrower has reestablished an acceptable credit reputation as required in
Topics 5100
and
5200
for Manually Underwritten Mortgages
A written explanation from the Borrower addressing adverse or derogatory information, in the form of a signed letter or an e-mail directly from the Borrower
Form 1077
or on a separate document in the Mortgage file, relating the Borrower’s explanation to the Mortgage file documentation and leading to a reasonable conclusion that:
The explanation is consistent with the adverse information reported and the other information in the Mortgage file
The financial mismanagement is unlikely to recur
The Borrower has reestablished an acceptable credit reputation
Evidence on the credit report and other credit documentation in the Mortgage file of the length of time since completion of the significant derogatory event to the date of the application (i.e., the recovery time period)
The following table contains the requirements for reestablishment of credit, including the minimum recovery time periods and, when applicable, additional requirements that must be met:
Requirements for the reestablishment of credit
Financial mismanagement
Significant derogatory event: Foreclosure
84 months from the completion date
or
When foreclosure resulted from a Mortgage that was extinguished in Chapter 7 bankruptcy, the recovery time period for a Chapter 7 bankruptcy caused by financial mismanagement, may be applied and counted from the date of the bankruptcy discharge, provided that:
The Mortgage file must contain documentation supporting that the foreclosure resulted from a Mortgage that was extinguished in a Chapter 7 bankruptcy
The foreclosure proceedings did not begin before the bankruptcy filing, and
The Mortgage was not reaffirmed through the bankruptcy
N/A
Significant derogatory event: Deed-in-lieu of foreclosure
48 months from the execution date
Additional requirements
Whenever a Borrower has had a previous deed-in-lieu of foreclosure within the last seven years, the Mortgage must either be:
A purchase transaction Mortgage secured by a Primary Residence with a maximum LTV/TLTV/HTLTV ratio of the lesser of 90%, or the maximum LTV/TLTV/HTLTV ratio for the transaction, or
A “no cash-out” refinance Mortgage that meets the requirements of
Chapter 4301
Additionally, the Mortgage file must contain evidence of the completion of the deed-in-lieu of foreclosure.
Significant derogatory event: Short sale
48 months from the completion date
Additional requirements
Whenever a Borrower has had a previous short sale within the last seven years, the Mortgage must either be:
A purchase transaction Mortgage secured by a Primary Residence with a maximum LTV/TLTV/HTLTV ratio of the lesser of 90%, or the maximum LTV/TLTV/HTLTV ratio for the transaction, or
A “no cash-out” refinance Mortgage that meets the requirements of
Chapter 4301
Additionally, the Mortgage file must contain evidence of the completion of the short sale.
Significant derogatory event: Chapter 7 or Chapter 11 bankruptcy
Recovery time period
48 months from the discharge or dismissal date
Additional requirements
Whenever a Borrower has had a bankruptcy within the last seven years, the Mortgage file must also contain:
Copies of the bankruptcy petition, schedule of debts and discharge or dismissal
Evidence to indicate that all debts not satisfied by the bankruptcy have been paid or are being paid
Any other evidence necessary to support the Seller’s determination that the Borrower has reestablished and maintained an acceptable credit reputation
Significant derogatory event: Chapter 12 or Chapter 13 bankruptcy
Recovery time period
24 months after the discharge date or 48 months from the dismissal date
Additional requirements
Whenever a Borrower has had a bankruptcy within the last seven years, the Mortgage file must also contain:
Copies of the bankruptcy petition, schedule of debts and discharge or dismissal
Evidence to indicate that all debts not satisfied by the bankruptcy have been paid or are being paid
Any other evidence necessary to support the Seller’s determination that the Borrower has reestablished and maintained an acceptable credit reputation
Significant derogatory event: Multiple bankruptcy filings in the past seven years
Recovery time period
60 months from the most recent discharge or dismissal date
Additional requirements
Whenever a Borrower has had a bankruptcy within the last seven years, the Mortgage file must also contain:
Copies of the bankruptcy petition, schedule of debts and discharge or dismissal
Evidence to indicate that all debts not satisfied by the bankruptcy have been paid or are being paid
Any other evidence necessary to support the Seller’s determination that the Borrower has reestablished and maintained an acceptable credit reputation
Other significant adverse or derogatory credit information
Recovery time period
48 months from the most recent significant adverse or derogatory credit information
(ii)
Documenting Borrower explanation of adverse or derogatory information
A written explanation is required for significant derogatory information. The purpose for requiring a written explanation is to assist the Seller in determining whether the Borrower’s credit problems were due to extenuating circumstances (factors clearly beyond the control of the Borrower) or whether they reflect financial mismanagement (the Borrower’s disregard for the payment of obligations when due).
When adverse or derogatory information is not significant, the Seller may need to request that the Borrower provide a written explanation, in the form of a signed letter or an e-mail directly from the Borrower, of the circumstances causing the payment difficulty. The decision to require an explanation letter should be based on such factors as the age of the delinquent account, the frequency and severity of late payments, the size of the account balance and payment, when the late payments occurred and the status of the Borrower’s other credit accounts.
In order to accomplish this purpose, it may be necessary to allow someone to assist the Borrower in preparing the explanation. If the Borrower needs assistance in preparing a written explanation, another party, such as the real estate agent or loan officer, should be encouraged to assist the Borrower in preparing the explanation. As long as the explanation accurately reflects the facts as related by the Borrower (as evidenced by the Borrower’s signature attesting accuracy), the Seller should accept the explanation as documentation for its review.
A written explanation in and of itself does not satisfy the Seller’s responsibility to determine the Borrower’s willingness to repay. When adverse or derogatory information is considered significant, as explained in
Section 5202.1(d)
, the Seller must relate the reasons for the late payments, as stated by the Borrower, to the other information about the Borrower’s credit history contained in the Mortgage file. The Seller must reasonably be able to conclude that:
The explanation is consistent with the adverse information reported and the other information in the Mortgage file
The explanation establishes a credible cause for the late payments
The Borrower represents an acceptable credit risk and exhibits the ability and willingness to repay the Mortgage
(e)
(i)
Inquiries
Inquiries on the credit report generally reflect the Borrower’s requests for new or additional credit.
When the credit report indicates that a creditor has made an inquiry within the previous 90-day period, the Seller must determine if additional credit was granted. If additional credit was granted, the Seller must:
Obtain verification of the debt; and
Include the monthly payment in the DTI ratio calculation. Refer to
Section 5401.2
.
When underwriting with FICO scores, a reason code will alert the Seller that the number of inquiries affected the Borrower’s FICO score and, therefore, should not be overlooked in underwriting. In this case and when underwriting without FICO scores, the Seller must decide whether the number of recent inquiries, especially when combined with other credit information, increases the risk of the Borrower’s credit profile.
Several inquiries within the most recent 12 months generally increase risk and, when combined with high balances-to-limits on revolving accounts, may indicate that the Borrower is in danger of becoming overextended. In addition, several recent inquiries combined with a credit history of short duration may make even mild derogatory credit information significant.
To address how risk evidenced by several recent inquiries, layered with other credit reputation risks, affects the Borrower’s overall credit reputation, the Seller must look at:
The type of credit being sought
The total amount of credit outstanding, and
The overall credit utilization reflected on the report
(ii)
Age of accounts
The Seller must review the age of the Borrower’s credit obligations to determine whether there has been a recent, significant increase in the number of open accounts. The age of an account is found on a credit report by referring to the “date opened” column. The length of a Borrower’s credit history can be measured from the oldest account.
Like inquiries, several recently opened accounts may be a warning that the Borrower could become overextended and require a more conservative approach to reviewing both Borrower credit reputation and capacity. A credit history with all recently opened accounts may indicate that the Borrower lacks sufficient experience managing financial obligations.
The Seller should also review the age of accounts to determine if there has been a significant change in the Borrower’s credit profile. A change in the Borrower’s pattern of credit use, which includes several newly opened revolving accounts, several inquiries and high utilization of revolving Tradelines, introduces significant layering of risk to the Borrower’s credit reputation.
When underwriting with FICO scores, a reason code will alert the Seller that the age of accounts affected the Borrower’s FICO score and therefore should not be overlooked in underwriting. In this case and when underwriting without FICO scores, the Seller must decide whether the age of accounts, combined with other credit information, increases the risk of the Borrower’s profile.
To address how the age of a Borrower’s accounts, layered with other credit risks, affects the Borrower’s credit reputation, the Seller must consider:
The amount of outstanding credit
The overall utilization of revolving accounts, and
(iii)
Balances-to-limits/high overall utilization of revolving credit
The Seller must evaluate balances-to-limits ratios of revolving accounts and the overall revolving credit utilization.
When evaluating balances-to-limits, the Seller must:
Compare the current balance for each open account to the high credit or limit to determine whether there is a pattern of accounts with balances at or near their limits
Consider multiple revolving accounts with balances more than 50% of their limits an additional risk when evaluating credit reputation. The more accounts with high balances-to-limits and the higher the percentage used, the higher the risk.
High balances-to-limits may also indicate the Borrower is making minimum payments on revolving accounts rather than reducing the debt and may be at or near payment capacity. Any derogatory information in a credit history within the most recent two years combined with several revolving accounts at or near their limits should be considered significant derogatory information when evaluating the credit reputation.
When evaluating revolving credit utilization, the Seller must:
Compare the overall amount of outstanding revolving credit to the overall amount of revolving credit available to the Borrower, as shown on the credit report, to determine credit utilization
Consider usage of more than 60% of available revolving credit a risk factor when evaluating credit reputation. The higher the Borrower’s overall utilization of revolving credit, the higher the risk.
A pattern of revolving accounts at or near their limits and utilization of a high proportion of the overall revolving credit available to the Borrower, especially when combined with newly opened accounts, indicates that the Borrower is becoming overextended and there is significant risk in the Borrower’s credit reputation
Example:
For a Caution Mortgage with at least two Feedback Certificate messages related to high balances-to-limits or high overall utilization of revolving credit, the Seller should presume the Borrower’s credit reputation is unacceptable.
The Seller may not use the lack of adverse or derogatory credit information as an offset for high balances-to-limits or high overall utilization of revolving credit.
When underwriting with FICO scores, a reason code will alert the Seller that the balances on revolving accounts are too high or the proportion of balance to high credit on bank revolving or all revolving accounts is too high and affected the Borrower’s FICO score.
The Seller must determine whether the balances-to-limits and overall revolving utilization, combined with other credit information, make the Borrower’s credit reputation unacceptable.
Example:
A Borrower with multiple revolving accounts with balances at or near limits, overall utilization of revolving credit of 90%, and less than four years of credit history would have an unacceptable credit reputation, even if there were no derogatory information in the credit report, unless the Borrower had sufficient cash reserves to pay off all revolving account balances and the Borrower’s total DTI ratio was within guidelines.
To address how high balances-to-limits, when layered with other credit risks, affect the Borrower’s overall credit reputation, the Seller should look at all of the following:
The age of the Borrower’s credit
The number of accounts with outstanding balances
(f)
Documenting and delivering Underwriting Scores and Indicator Scores
(i)
Documenting the Underwriting Score and the Indicator Score
When a Minimum Indicator Score is required, the Seller must:
Form 1077
or a similar document in the Mortgage file the Underwriting Scores and the Indicator Score and how each was identified
Retain the source documentation for the Indicator Score in the Mortgage file
(ii)
Delivering an Indicator Score
When the Indicator Score is based on usable Credit Scores in accordance with this section, the Seller must deliver the Indicator Score in ULDD Data Point
Loan Level Credit Score Value
and deliver the method used by the Seller to determine the Indicator Score in ULDD Data Point
Loan Level Credit Score Selection Method Type
:
“Middle Or Lower Then Lowest”
“Middle or Lower Then Average”
“Average Then Average”
If the Seller determines there is no usable Indicator Score in the Mortgage file due to
insufficient credit information
, the Seller must select the valid value of “Insufficient Credit History” in ULDD Data Point
Credit Score Impairment Type
.
If the Seller determines there is no usable Indicator Score in the Mortgage file due to
significant inaccurate credit information
, the Seller must select the valid value of “Significant Errors Score” in ULDD Data Point
Credit Score Impairment Type
.
