Credit Clarity: Helping Borrowers Understand What Lenders See (National Mortgage Professionals Month)

September is National Mortgage Professionals Month, which makes it the ideal time to acknowledge the dedicated loan officers, processors, underwriters, servicers, and insurers who help homeowners bring their dreams of homeownership into fruition!

If you’re a mortgage professional, you know first-hand how much work it takes to get a new applicant to the closing table. Along with ensuring proper paperwork and meeting key deadlines, you also provide essential education along the way.

Answering confused applicants’ credit FAQs comes with the lending territory, but it can get tedious over time. To help make these conversations easier and more efficient, we’ve compiled the most common credit challenges borrowers face, along with practical ways to explain and resolve them.

Table of Contents

7 Common Credit Hurdles & How to Explain Them to Your Borrowers

While no two borrowers are exactly alike, many face the same challenges when it comes to their creditworthiness and mortgage eligibility. Here are some of the most pervasive problems and how to solve them:

#1 Inconsistent Employment History

Fifty years ago, most people worked at the same company for several decades. However, today’s workforce takes a much different approach to their careers. The average job tenure is just 3.9 years, showcasing how people aren’t afraid to switch jobs for better opportunities.

Another trend is a rise in entrepreneurship and gig work. People are increasingly taking on second jobs or side hustles to boost their income, with over one-third of Americans participating in the gig economy. Meanwhile, nearly 20% of U.S. adults are actively running or starting their own businesses.

As the employment landscape becomes more complex, so does mortgage underwriting. Many mortgage applicants don’t realize that they must verify their stated income with at least two years of tax returns. This means the following types of income generally won’t qualify:

Side hustle that isn’t reported to the IRS
Seasonal income that isn’t consistent year over year
One-time bonuses or commissions
Unreported cash tips
Freelance income without documented contracts or 1099s
Brand new business revenue

To set clear expectations from the start, let your applicants know that recent or unreported income from side hustles, freelance gigs, or second jobs won’t necessarily strengthen their mortgage application. It’s also wise to caution them against making sudden job changes in the year or two before buying a home.

#2 High Debt-to-Income Ratios

After verifying an applicants’ monthly income, you must compare it against their total monthly debts (credit cards, auto loans, student loans, etc.) to see how much room they have left in their budget. This simple calculation produces their debt-to-income (DTI) ratio.

Most lenders only approve applicants with DTIs below 43%, though 36% or less is considered “ideal.” Applicants with higher DTIs can improve this crucial metric by:

Paying down their credit card balances.
Holding off on new loan applications until after closing on their mortgage.
Increasing their qualified income, if possible.

As a lender, it’s important to frame DTI as a snapshot of your applicants’ monthly affordability so they feel empowered and motivated to improve it.

#3 Low Credit Scores

For a mere three-digit number, credit scores hold a lot of weight when it comes to mortgage eligibility. A “good” credit score starts at around 670, while an “excellent” credit score of 800 or above can help applicants qualify for best mortgage rates and terms.

Before optimizing their credit scores, applicants need to understand its core components. The five main credit scoring factors include:

Payment history – How consistently an applicant has made their debt payments in the past.
Credit utilization – How much of their available revolving credit they’re actively using.
Length of credit history – The average age of their open credit accounts.
Credit mix – The various types of credit they’ve used.
New credit inquiries – Recent applications for new credit cards, loans, or lines of credit.

After learning about these credit scoring factors, many applicants still struggle to optimize their scores on their own. That’s where Certified Credit’s score improvement tools come into play. These tools include:

ScoreNavigator – This credit management platform allows you to generate custom Mortgage Action Plans (M.A.P.s) for your applicants, simulate the impact of various credit decisions, and determine the best day to re-pull their credit after they’ve made your suggested improvements.
FICO® Score Mortgage Simulator – This powerful tool lets you model “what if” scenarios, like paying down balances or correcting credit reports errors, to estimate your applicants’ potential score improvements using FICO’s latest credit scoring models.
CreditXpert – CreditXpert’s AI-powered platform enables mortgage lenders to optimize credit profiles and increase loan approvals by quickly identifying applicants’ credit potential and generating tailored improvement plans.

You can use these tools to provide personalized advice to your non-qualifying applicants. Not only can this guidance help them achieve stronger creditworthiness faster, but it can help you earn their trust and loyalty along the way.

#4 Credit Report Errors

A low credit score isn’t always due to an applicants’ poor management—it could also be from an error on their credit reports. These errors are more common than you think, afflicting nearly half of all consumers. A quarter of consumers have “serious errors” that drag down their credit scores.

Some of the most common credit report errors include:

Inaccurate personal information
Incorrect accounts
Improper balance sizes
Outdated collections
Missing accounts

As a mortgage professional, it’s a good idea to encourage all prospective borrowers to review their credit reports’ accuracy before submitting a formal application. If they discover any errors, prompt them to dispute them right away, as it can take up to 30 days for the credit bureaus to complete their investigations.

Your borrowers can dispute errors online, over the phone, or by mail using the following credit bureau contact information:Experian

Phone – (888) 397-3742
Online – experian.com/disputes/main.html
Mail – Experian
O. Box 4500
Allen, TX 75013

Equifax

Phone – (866) 349-5191
Online – equifax.com/personal/credit-report-services/credit-dispute/
Mail – Equifax Information Services LLC
O. Box 740256
Atlanta, GA 30348

TransUnion

Phone – (800) 916-8800
Online – https://dispute.transunion.com
Mail – TransUnion LLC
Consumer Dispute Center
O. Box 2000
Chester, PA 19016

#5 Limited Credit Histories

While many people have errors on their credit reports, around 10% of Americans face a more pressing issue: credit invisibility. These consumers lack sufficient data to generate a credit score, often due to being young or recently immigrating to the country.

Without a credit score, credit-invisible consumers struggle to qualify for credit cards—let alone sizable mortgage loans. This creates a tricky catch-22: they need “good credit” to access credit-building products, but can’t qualify for those products until they establish some credit history.

Fortunately, there are many effective ways to establish credit history from scratch, including:

Opening a secured credit card
Applying for a credit-builder loan
Becoming an authorized user on a parent’s or spouse’s credit card account
Reporting alternative credit data, such as rent or utility payments
Applying for credit with a creditworthy co-signer

Using these tactics, it can take applicants around three to six months to generate an initial credit score. From there, you can help them improve their scores over time using our credit score improvement tools.

Read More: How to Build Credit with No Credit History

#6 Identity Theft and Other Forms of Fraud

Digitization has made many aspects of the mortgage process more convenient, but it’s also created more opportunities for bad actors to pursue fraudulent schemes. As of 2024, the Federal Trade Commission (FTC) received over 1.1 million identity theft reports and 2.6 million fraud reports, generating $12.7 billion in losses.

Consumers may not realize they’ve fallen victim to identity theft or mortgage fraud right away. While they’re in the dark, fraudsters can do a lot of damage to their credit.

Since identity theft and fraud is on the rise, you should suggest that your applicants review their credit reports regularly. You can also strengthen their efforts by employing fraud and risk mitigation solutions of your own.

At Certified Credit, we have a wide variety of tools that can bolster your fraud prevention, from our automated undisclosed debt monitoring solution, Cascade UDM, to our comprehensive Wire Transfer Fraud, ADV-120, MERS, Mortgage Participation, and Liens and Judgment reports.

Read More: How to Tackle Wire and Title Fraud in 2024

#7 Frozen Credit Files

Some consumers freeze their credit reports with Equifax, Experian, and TransUnion to prevent fraudulent applications. Credit freezes stop any new credit applications from going through.

While they’re effective fraud prevention tools, credit freezes can also hose up the mortgage application process if they’re not lifted in advance. To prevent unnecessary delays, remind your applicants to lift their credit freezes a few days before they plan to submit their applications with you.

Check out this quick step-by-step video guide for resolving and re-ordering applicant’s frozen credit reports.

More Resources to Share With Your Borrowers

Sharing our solutions for these top seven eligibility issues can go a long way in bringing your borrowers up to speed. If you want even more resources to pass long, here are some more articles your applicants may appreciate:

Educate Your Applicants and Empower Their Success With Certified Credit

Mortgage eligibility issues can be intimidating at first, but with patient explanations and practical tips, you can transform your applicants’ confusion into clarity. Certified Credit’s helpful resources can assist with this process.

Along with our educational content, credit score improvement tools, and fraud & risk mitigation solutions, we also offer: