Residential mortgage credit reports (RMCRs) can be confusing for sure. With so much to know already about the credit world, each new term seems to add to the stress level, and RMCRs might be one of these terms for most potential borrowers.
If you are looking for a home loan, you absolutely need to know what RMCRs are. The first thing you need to understand is that these reports are not at all like regular credit reports. Instead, residential mortgage credit reports are used strictly for real estate loans and are required by lenders and mortgage brokers to assess a borrower’s ability to repay the mortgage.
Residential mortgage credit report vs. consumer credit report
A regular credit report doesn’t suffice when applying for a home loan or a real estate loan like it does, for instance, with credit card applications or auto loans. In fact, mortgage credit reporting is nothing like regular credit reporting.
Because a residential mortgage loan is usually for a much larger amount and has longer payback duration than other kinds of loans, it puts the lender at the risk of a much larger loss than do usual loans.
When a borrower makes a credit card or an auto loan application, the lender only needs a credit report provided by one of the three credit reporting companies: Experian, Equifax or TransUnion. The terms of a borrower’s loan account are then set up based on the information given in one of those credit reports and his/her credit score.
However, when it comes to a mortgage loan, the information required by the mortgage lender is a lot more exhaustive than a regular loan, owing to the larger risk. Thus, a lender pulls up the three credit reports provided by the credit bureaus Experian, Equifax and TransUnion and all three FICO scores to approve or deny a loan application.
What are residential mortgage credit reports?
As mentioned before, for mortgage loans all three credit reports have to be used. But that is a lot of redundant information about the same account, and even more so if one is applying for a joint loan and six credit reports are needed. However, there’s no point in a mortgage lender going through the same information over and over.
And that is where intermediary agencies called mortgage credit report companies come in. These intermediary agencies provide all kinds of reporting services to mortgage brokers and lenders to help them make an informed decision about mortgage loan applications.
In this case, credit report companies for mortgage brokers get all three credit reports for a borrower from the credit bureaus and compile the required information into one long, thorough report, which is referred to as a residential mortgage credit report.
Residential mortgage credit reports are, in simple words, regular credit reports times three. They are essentially investigation reports that mortgage lenders use to thoroughly examine whether or not a person has a good enough income stream and is responsible enough to be eligible for a mortgage.
Why do you need RMCR credit reports?
If your credit information is complicated and you are applying for a mortgage loan, mortgage brokers or lenders might pull up your overall information—credit history, employment and legal history, and residence—to determine whether or not to grant you the loan.
And if lenders have more than four questions about borrowers’ credit history, they might get mortgage credit report companies to get residential mortgage credit reports.
The lenders then review the RMCR, along with the borrower’s income, assets, and tax returns as a part of the underwriting process. In such cases, the application processing might take longer than usual.
What information does an RMCR contain?
A standard RMCR usually divides information into three different sections, and the three sections when combined make up a Tri-merge credit mortgage report. It has information about credit score in one of the sections, inquiries and personal identification information in their own section, and the negative information goes in a different section. It makes up a report that is much easier to read than three, or six, separate reports.
Furthermore, there are other kinds of information that a residential mortgage credit report contains:
Mortgage credit report companies that formulate these RMCRs are required by the Department of Housing and Urban Development to verify the borrower’s employment history and earnings.
In case the borrower has changed jobs in the last two years, the companies also need to include information about the previous employer in the report. To that end, RMCR investigators might also need to conduct telephone interviews with the applicant’s current and past employers.
This information is crucial to prepare residential mortgage credit reports for loan applicants. Any legal record within the last seven years—judgments, convictions, foreclosure, bankruptcies, and so on—have to be reported in the RMCR credit reports.
The borrower’s credit information has to be included in the report. It is basically a summary of the borrower’s prior debt, debt account information, amount to be paid and payment history, among other things.
The current status of the prior debt and the historical payment information is crucial for lenders to understand whether or not the person has made timely payments in the past and predict his/her likelihood of doing so in the future.
How do lenders review tri-merge credit reports to make mortgage decisions?
Underwriters have to thoroughly review the RMCRs to determine the borrower’s eligibility, the loan interest rates and the loan-to-value (LTV) ratio for the mortgage.
First, the underwriter has to make sure all the basic information—name, birthdate, social security number, and address—is correct. This is to make sure that the credit reports for the right person have been pulled up from the credit bureaus.
Then to determine the FICO score indicator, the score models have to be examined. From among the multiple credit scores given in the credit reports, the examiners usually take the middle score as the FICO score indicator. As long as the credit reports are not drastically different, the credit scores should be similar and the middle score gives a correct picture of all three credit reports.
The underwriter then reviews the borrower’s trade lines, which is essentially a line of credit, like a credit card, auto loan or real estate loans. The number of these credit lines, their payment history and the current status determine the credit score in a large part.
Other things to bear in mind are compliance with trade line requirements, account opening duration, payment history, amount due, and any failure to make payments. All of these factors help an underwriter decide if a person should be granted a mortgage.
Finally, any foreclosures, charge-offs and bankruptcies are to be taken into account. Having any of these negative activities on the credit report ruins a borrower’s chances of getting a mortgage loan. If such derogatory accounts are present, they need to be paid off and rectified before the loan application is made.
The underwriter then examines the credit reports for inquiries, fraud alerts and verifies the addresses. The borrower has to provide information about any new credit that s/he has obtained. Failure to do so can negatively impact the Debt-to-Income (DTR) Ratio.
If the borrower has made any fraud alerts, they have to be verified by the investigators. Apart from that, any addresses mentioned in the credit report that don’t match the borrower’s resident history on the application have to be explained by the borrower.
There are many variables that need to be reviewed carefully to prepare a residential mortgage credit report, and that means that the underwriter has to be experienced and discerning in determining whether or not a person should get a loan, along with the loan interest rates, and LTV ratio.
How to get a residential mortgage credit report?
Potential borrowers that have applied for a mortgage-related loan might have their RMCRs in their final paperwork. As a borrower, you cannot order this report from the mortgage credit report companies, as they only provide the report to the mortgage lenders and brokers.
Instead, individuals can request their lenders to give them a copy of their residential mortgage credit reports, and we advise that you do so. It is a thorough report that gives valuable information regarding your credit reports, your FICO scores and the reasons your score wasn’t higher. And all of these details can be very useful in developing a stronger loan application in the future if you so need.
So why do mortgage lenders need information from all three credit bureaus as opposed to just one? The information in the three credit reports, though not largely different, do contain some variations. Careful examination of the residential mortgage credit report is another step in lenders’ determining an applicant’s loan eligibility and ability to repay the debt.
For anyone who wishes to apply for a real estate loan, it is advised that they request their credit reports from all three credit agencies—Experian, Equifax, and TransUnion—at least a few months before making the loan application. That gives you enough time to correct any mistakes and address any confusion in your reports and be prepared thoroughly for the examination process.