Through the years, pressure has mounted for increased speed and turn time in rendering credit decisions for mortgage applications. One component of that process is also under more pressure – the credit supplement.
Getting a credit report updated is not a real-time process, as payments made to lenders and creditors today may not update on a report for weeks. That can be a sizable gap in lenders' minds with new loan applications in hand – as you want to know absolutely everything about the borrower, with no stone unturned.
What is a credit supplement?
A credit supplement is a process to allow just that, a third-party revision of any item on a credit report. Essentially, it is a normal process in consumer lending for one creditor to ask another for a real-time status update on an existing account, especially since the initial credit report was pulled at the time of loan application. A lot can happen in the 45 to 60 days it takes from mortgage loan application to loan closing date. Not only are credit supplements an excellent tool for ongoing borrower creditworthiness insights, but many lenders also pull another full credit report just days before loan closing. We call that 'wearing a belt and suspenders!' That newest credit report is then compared to the initial report at the time of loan application, and borrowers will be required to explain any significant differences. You might be surprised how often a new tradeline for a car, boat, or furniture shows up out of nowhere, despite borrowers being warned against such impulses before loan closing.
Why invest time and resources into a credit supplement?
Many lender policies are driven by expectations from Government Sponsored Entities (GSEs), Fannie Mae and Freddie Mac, who maintain rigorous credit standards. If not followed, lenders are forced to buy back such loans, and "buyback' is among the most frightening terms in mortgage lending.
Credit supplements are a suitable and direct method to go straight to pre-identified credit-issuing entities and ensure that borrowers have maintained good and consistent payment behaviors throughout the mortgage application process and will not be falling on their face just before closing on a new loan agreement. Credit supplements are also heavily used in mortgage refinance requests.
Some examples of how credit supplements are helpful:
- Student loans deferred, but not showing deferment dates
- Derogatory items on a credit report. Example: If a borrower had collections on their credit report or a judgement filed against them, lenders often require credit supplements proving they have been satisfactorily resolved
- A lender may request an updated balance and payment history on the existing credit file
- A lender may want to add rental history or other non-traditional tradelines to the file to show proof of payments
Unfortunately, the manual nature of a credit supplement makes them labor and time-intensive. There is a conference call with the credit bureau, the account's creditor in question, and the borrower, who has to give consent to proceed. If there are multiple inquiries, the process must repeat itself for each tradeline in question.
Furthermore, many borrowers often don't realize there is a cost to them, ranging from $10 to $20 for each credit supplement inquiry. Many consumer credit experts suggest borrowers review their credit report before applying for any loan, thereby clearing any discrepancies or questions beforehand. It can save time, money, and frustration in the long run.
We are currently seeing historically low mortgage rates, translating into record mortgage applications. Wait times for such conference calls are also at epic highs – and borrowers have little choice except to remain on the line.
Click here to learn more about how Informative Research will get you the most current credit information on your borrowers within days.
