Wider credit opportunities are in store for mortgage shoppers starting this weekend as Fannie Mae releases 10.0, the 31st version of its automated credit decision engine named Desktop Underwriter or DU.
DU was originally released in 1995 according to Kristi Waters, credit risk analyst at Fannie Mae.
Earlier this year, I wrote separate columns about the two most important enhancements to DU 10.0, originally set for release on June 25.
The first enhancement is a newly automated credit decision process for borrowers with no-credit-scores (Fannie’s term is non-traditional credit). The second is trended credit data being added to your residential mortgage credit report, giving more consideration to borrowers who pay their credit card balances off each month.
Today’s column focuses on credit scores and no-credit-score mortgages.
In the past, if mortgage applicants did not have enough traditional credit to generate credit scores, lenders could still manually underwrite and decide on those would-be borrowers.
As a practical matter, few lenders do any manual underwriting for fear of missing something that the automated process detects and having to buy the loan back later from Fannie Mae (for not meeting underwriting standards).
First, a loan officer first runs your credit report. That, and the mortgage application information, is inputted into DU.
That’s enough for a traditional Fannie Mae DU approval “as long as I generate at least one (credit) score,” said Mindy Armstrong, Fannie Mae’s DU product manager.
Traditional DU is likely better if you have a no-score approval because it goes off the actual credit scores. Non-traditional DU assumes the worst credit score bucket of 620-639, offering the most expensive pricing.
For the new no-credit-score automated approval, only your down payment or equity (in the event of a refinance), debt-to-income ratios, cash reserves and loan-to-value are considered in the loan decision, according to Armstrong.
You will need two sources of non-traditional credit history.
“One must be housing related – a 12 month history,” said Waters, the Fannie Mae credit risk analyst. The other type could be utility bills, child care payments, tuition paymes, also on a regular 12-month basis.
A completed verification of rent sent from your lender to your landlord or 12 months of cancelled checks should suffice. Similar types of proof apply for the second form of credit.
For Orange County, the maximum loan amount cannot exceed $417,000 and you must put at least 10 percent down (or 10 percent equity for refinancing), all of which can be a gift. It must be primary residence, single unit.
Let’s say you are a year out from being ready to buy, and you don’t have enough traditional credit to generate a score. You should strongly consider a parent co-signing or getting two secured credit cards, whereas you open up $300 savings accounts as collateral for say $300 card limit credit cards. Charge against them every month and pay them off in full every month.
Another thing you can do is pay to have your excellent rent history added to your credit report for purposes of DU risk assessment and credit approval only.
There are many types of credit reports being offered. DU requires the following FICO credit report versions: Equifax Beacon 5, Experian Fair Isaac Risk Model V2SM and Transunion FICO Classic 4.
Shop around. Rental Kharma will charge you $88 to report your last two years of rents to Transunion. This is enough to be incorporated into the DU risk decision, said Bill Butler, COO of Rental Kharma.