A Comprehensive Look at Borrower Debt in Three Steps
Undisclosed debt is a constant concern for mortgage lenders during the underwriting process of mortgage loans. Consumers, whether intentionally or not, often increase owed funds during the quiet period — the phase between the qualification of a loan and the closing of it. This often leads to regulatory penalties and higher risks for lenders; however, lenders can reduce risks significantly in just a few steps.
Step 1: Invest in ongoing monitoring
Equifax offers an ongoing monitoring service for lenders. This service allows lenders to close low-risk loans more efficiently and reduces buy-back and compliance risks. It also reduces the number of closing disruptions while focusing on improving the borrower experience. By monitoring the credit usage of consumers during the quiet period, lenders can interact with the borrower about his or her usage. This can also help ensure lenders have ample time to meet reporting requirements by regulators about changes in creditworthiness and debt-to-income ratios.
Step 2: Review debt-to-payment ratio
Lenders need to monitor not only how many loans the individual has, but also how easily he or she can meet payment requirements once the new loan is in place. To minimize risk of default, the debt-to-payment ratio is often employed, but qualifying individuals at the start of the underwriting period is not enough. Re-qualifying borrowers who have obtained additional debt prior to closing is critical.
Step 3: Use credit reporting wisely
Most lenders currently use a static credit report (also known as the pre-close report) to track changes in creditworthiness and debt. This remains an important step in the process, though it is far from the most comprehensive solution. To monitor undisclosed financing right before signing, credit reports are a basic step and a last confirmation. Credit reports work well as a final tool to ensure full disclosure just prior to the closing.
To learn more about the dynamic credit monitoring services available to lenders, contact us at 1-888-202-4025.