Authorized User Accounts and Credit Scores

One of the ways Credit Repair is done right now is by adding someone to a credit account that is in good standing as an Authorized User.  These Authorized User Accounts are also a good strategy for someone who really has no credit history at all.

I recently did this for our daughter who is in College.  I had a couple of credit cards that I asked that they issue a card in her name. Her credit is not considered for the Authorized User Accounts and her Credit Scores will go up as long as I keep the balance down on the accounts, and make the payments on time.

Another important factor in helping someone raise their credit scores using an Authorized User Account, is to be certain the account was opened after the person was 18 years old.  The accounts I added my daughter to were only 2 years old.  So they worked.Mortgage Lending Credit Score Guidelines are changing in regards to these types of accounts, and in some cases, we can not count the Authorized User Accounts AT ALL.

Why is that?  Because the Mortgage Underwriter agencies want to avoid folks being able to “game” the system.  If you’ve had negative credit, or you don’t REALLY have a history of making payments on time – they don’t want to make a mortgage approval based upon an inflated credit score.

FHA Loans and Authorized User Accounts

Current FHA Loan Credit Score guidelines state that, “if the borrower has little or no usable credit and has only authorized user accounts, supplemental non-traditional credit is required – non-traditional credit guidelines will be applied.”

So what is “non-traditional” credit?  It means they are going to look at your car insurance, your cell phone bills – other things that you should naturally be paying.  The “non-traditional” mortgage loans are routinely approved… HOWEVER, there is a higher risk factor, and because of that, the rates tend to be slightly higher too.

*Note: If the account on which the borrower is an authorized user is in the name of the non-borrowing spouse and the property is located in a community property state or the borrower(s) reside in a community property state the debt must be included in the ratios.  North Carolina is a Community Property State.

VA Loans and Authorized User Accounts

The Veteran’s Administration does not actually “make” VA Loans, just like FHA doesn’t make FHA Loans.  They are credit Insurance Agencies.  As such, they provide lenders with the guidelines under which they will insure a loan.

Veteran’s have a great benefit with VA Loans that have no down payment requirement and no monthly PMI charges.  As a matter of fact, VA Loans have no Credit Score Requirement Guidelines!  Because of that, Authorized User Accounts are a matter of Underwriter review and discretion.

In GENERAL, you should have at least a 600 to 620 credit score for VA Loan Approval.

Conventional Loans and Authorized User Accounts

Fannie Mae and Freddie Mac are the primary Underwriting Guidelines Banks and Lenders use to approve Conventional Loans.  Of course, when it comes to something as complicated as a Credit Score and Authorized User Accounts they view the risk pretty much from the same view-point.

Freddie Mac does allow for slightly higher “over all” debt to income ratios, and because of that, they are more conservative when viewing Authorized User Accounts.

Fannie Mae and Freddie Mac’s Automated Underwriting system takes authorized user accounts into consideration as part of the Automated credit risk assessment. “Fannie requires our Underwriters to review authorized user accounts to be sure that the credit report is an accurate reflection of the borrower’s credit history.”

Again, they want to be certain that these accounts have not “artificially” bumped up the credit score.

If the borrower has several authorized user accounts but only has a few accounts of his/her own, the lender should establish:

• the relationship of the borrower to the owner of the account,
• if the borrower used the account, and
• if the borrower makes the payments on the account.
• If the authorized user trade line belongs to another borrower on the mortgage loan, no additional investigation is needed.

On the other hand, several trade lines in good standing and only a minor number of authorized user accounts, the lender could make the determination that the credit report is an accurate reflection of the borrower’s credit history.  This is especially true when you have Authorized User accounts where the Primary Account “holder” is someone who is not going to be on the mortgage.

The lender is not required to review an authorized user trade lines that belongs to the borrower’s spouse when the spouse is not on the mortgage transaction.

Real Life EXAMPLE

Couple gets married in August, decide they want to buy a house in January.

He has 5 credit accounts, including a car payment and 4 credit cards – his middle score is 695.

She has 4 credit accounts, including 2 student loans, and 2 credit accounts that she is an Authorized User on with her Mom.  Her middle credit score is 681.  Her mom is not going to be on the mortgage.

I needed to get cancelled checks showing she made payments on the 2 credit card accounts for the last 12 months, or I was going to have to do a re-score.  We think her scores would have gone down significantly.  Fortunately, she had been making the payments.

*Note: Additional guidelines/restrictions apply to manual underwriting.

USDA Home Loans and Authorized User Accounts

(The most aggressive on Authorized User Accounts!)

Lenders are required to analyze ALL open authorized user trade lines reported on the borrower’s credit report.

Lenders must ensure open authorized user trade lines reported on the credit report are an accurate reflection of the applicants approach to credit repayment and credit history.

Specific USDA Loan Credit Score Requirement Authorized User Accounts

• Must Prove Borrower is making the payments on the account for the past 12 months
• Must prove that the account is jointly owned by the borrower’s spouse
• Must prove that the account is jointly owned with someone else who will be on the mortgage
• Must remove the Authorized User Account from the Borrower’s Credit Report and re-score the borrower.

If one of these conditions cannot be met an underwriting recommendation of “Accept” must be manually downgraded to a “Refer” and the file must be manually underwritten… OR we must take the Authorized User Account off of the Credit Report and re-score the credit.

If you have questions about Authorized User Accounts and Credit Scores for a mortgage please call Steve and Eleanor Thorne 919 649 5058.  We work with folks who have no credit scores and “dinged up” credit everyday to help them get into a position to buy a house.  Sometimes it takes a little work, but it normally works out!!