An Authorized User account normally refers to Credit Cards. When a creditor allows an “Authorized User”, they give permission to the person originally approved for credit on the account to allow a spouse or other designated person to make charges to the account. Generally, the authorized user is not under “contractual obligation” to repay. This allows the “Authorized User” to use the good credit history on the account to reflect on their credit file – essentially without ever having made an on time payment. Because this is a unique situation, Mortgage Guidelines for Authorized User Credit Cards vary from program to program.
We’ve used Authorized User Credit Cards with our College age daughter. She’s on a couple of my credit cards (for emergency purchases) however, she’s not really keeping up with the balance, or making the payments. The fact that I DO KEEP UP WITH that, means that my conservative credit card use is also building a “picture” for the Credit Scoring Bureaus that she is someone who is extra responsible.
But that’s not really an accurate picture. I’m not saying my daughter isn’t super responsible – but she’s in college. Sometimes she has a job, sometimes she doesn’t. If I’m not also going to be on her mortgage, then the “findings” for approval are based upon an assumption about HER ability to make on time payments that is not completely accurate. We wouldn’t be comparing apples to apples – hoping this makes sense.
As such, each agency and Mortgage Loan Type, addresses this “Authorized User” type of credit history differently. I’m going to share the general guidance for Conventional, FHA, USDA and VA loans.
Mortgage Guidelines for Authorized User Credit Cards
Please remember that the final decision on how these accounts might help (or be taken off the score) are sometimes dependent on your application. Do you also have money in savings after closing? Do you have a strong job history. Is there someone else on the mortgage loan that doesn’t have Authorized User accounts who has a great credit history – each application is unique, and we try to look at it that way.
The Agencies (meaning FHA, USDA, VA, Fannie and Freddie) require that we review the credit on each file to determine “an accurate depiction of each borrower’s credit is provided and used at the time of underwrite.”
Authorized User Accounts
USDA Home Loans: USDA has the most conservatively aggressive stance on authorized user accounts. “Lenders are required to analyze all open authorized user trade lines reported on the borrower’s credit report and ensure that any open trade lines are an accurate reflection of the applicant’s approach to credit repayment and credit history. Closed authorized user accounts do not require consideration for manual or GUS loan submissions.”
GUS is the Government Underwriting System, and it is the “Automated Approval System” that we use for USDA Home Loans. In addition to getting an “automated” approval, USDA Home Loans must also go through our Underwriters, and they have to go to USDA Underwriters in NC who physically look through all of the notes on the file. If your loan does not meet the “Automated” Gus approval system – we are fortunate that our company allows us to mark the file for “Manual” Underwriting Approval.
A Manually Underwritten USDA Home Loan application is, by its nature, a more risky loan. Because of this, mortgage rates will be slightly higher – and the stipulations for approval are more stringent.
A GUS underwriting recommendation of “Accept” with open authorized user credit cards must include evidence in the lender’s permanent case file of one of the following:
• the trade line(s) in question is owned by another applicant on the mortgage loan application,
• the owner of the trade line is the spouse of an applicant, or
• evidence the applicant has been making payments on the account for the last 12 months.
• there are two or more other trade lines listed on the credit report which are not authorized use accounts, with at least 12 months of payment history listed to validate the credit score
“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.”
Conventional – Fannie Mae and Freddie Mac Mortgage Loans: Conventional Loans also face Automated Underwriting guidelines. Meaning, we enter all of your information in – and no matter what lender your loan is ultimately going to be sold to, they use the exact same underwriting criteria. For Fannie Mae loans, the “Automated Engine” is called DU or Desktop Underwriter. For Freddie Mac, the System is called LP, or Loan Prospector. Th Agencies give us the knowledge about what they will generally accept, however there is an “unknown” factor in these systems.
DU takes authorized user credit cards into consideration as part of the DU credit risk assessment – “the lender must review authorized user trade lines in order to ensure the credit report is an accurate reflection of the borrower’s credit history.”
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 uses the account, and
• if the borrower makes the payments on the account.
If the authorized user credit cards belong 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 authorized user accounts had minimal, if any, impact on the borrower’s overall credit profile; and
• the credit report is an accurate reflection of the borrower’s credit history.
The lender is not required to review an authorized user credit card accounts that belong to the borrower’s spouse when the spouse is not on the mortgage transaction.
It is the underwriter’s responsibility to make sure that the trade lines, as reported to credit, are an accurate reflection of the borrower’s overall credit history.
FHA Mortgage Loans: FHA home loans are usually the “easiest” and most forgiving loans to qualify for from a Credit Score perspective. Our Bank is allowing FHA Home Loans with Credit Scores between 619 and 580. This could be a huge advantage to those home buyers who are in a very unique situation where the Automated Underwriting System (AUS) will approve you, even with scores under 620.
Mortgage Guidelines for Authorized User Credit Cards FHA Loans
Accounts for which the borrower is an authorized user must be included in a borrower’s Debt to Income ratio (DTI) unless the lender can document that the primary account holder has made all required payments on the account for the previous 12 months. If less than three payments have been required on the account in the previous 12 months, the payment amount must be included in the borrower’s DTI.
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. DU approval is required to move forward as traditional credit.
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.” NC is NOT a Community Property State, so this does not apply to us.
Veteran Home Loans: As a rule of thumb, Lenders want to make mortgage loans to Veterans. The loans are backed by the US Government, and that makes them a lower credit risk for the Bank. Veteran’s who have scores UNDER 620 still require more paperwork and offsetting factors, however we CAN get VA Loans approved with credit scores between 600 and 619.
The Veteran’s Administration doesn’t really have a minimum credit score requirement – however for the last few years we’ve seen very few cases where a Veteran with scores below 620 getting an “Automated” Approval. We are very fortunate that we are allowed to do Manual Underwriting for VA Home Loans. Not all companies allow this.
Mortgage Guidelines for Authorized User Credit Cards for Veteran Home Loans state that if:
• there is evidence that the loan payments are being made by someone else, and
• there is no reason to believe that the applicant will have to participate in repayment of the loan,
Then the obligation may be excluded from the borrower’s monthly obligations. It will be underwriting’s discretion on each authorized user account as to if they meet the above criteria for exclusion from the DTI.
Bottom Line? If you are in the thought process of buying a home in NC, and you have questions about Mortgage Guidelines for Authorized User Credit Cards, please call Steve and Eleanor Thorne 919 649 5058. We work with borrowers who are at all stages of the purchase process. Our goal is to help you meet your desire to own a home!