Key players
- Mortgage lenders are financial institutions that provide the funds for a home loan.
- Mortgage lenders evaluate a borrower’s financial profile — including credit history, income and property value — to determine loan eligibility. If approved, the lender funds the loan.
- Mortgage brokers act as intermediaries between consumers and lenders to help consumers find the best loan options available to them.
- Mortgage brokers compare rates and terms across multiple lenders to find options to recommend for borrowers.
- They collect the borrower’s information and submit it to lenders for review, but do not fund the loan themselves.
- Credit bureaus collect and manage consumer credit data from various sources, including banks and other lenders, to create credit profiles. The bureaus are stewards of this data and generate solutions, like credit reports and credit scores, using this data.
- The three credit bureaus, also known as credit reporting agencies (CRAs), are TransUnion®, Equifax® and Experian®.
- Consumer credit data is financial information about a consumer, such as credit accounts, credit inquiries and borrowing and repayment behavior. It is regularly submitted by financial institutions as loans are opened, closed and paid upon. This data is important because it provides a snapshot of a borrower’s financial history, which lenders use to assess risk of potential default, given prior payment performance and current debt.
- Credit data can be used to create attributes that summarize details like payment history, outstanding debts and credit utilization. For example, TransUnion Trended Data provides a longitudinal view of consumer behavior over 30 months, capturing patterns on balances, payments and credit utilization over time rather than at a single point in time, enabling more predictive and nuanced risk assessments.
- In addition to maintaining credit data in a secure and compliant way, credit bureaus also provide the data in an organized, formatted summary which goes into a credit report the consumer sees. This is a standardized way for lenders to understand the data and make informed decisions about loan approvals, interest rates or terms.
- Bureaus can also generate a credit score delivered alongside the credit report data, using a lender’s preferred algorithm (e.g., FICO®, VantageScore®, etc.), to help the lender quickly assess risk.
- Government-sponsored enterprises (GSE), like Fannie Mae and Freddie Mac, help keep the mortgage market running smoothly.
- GSEs don’t issue loans directly to borrowers, rather they buy mortgages from lenders after approval, bundle them into securities, and guarantee those securities for investors. This process returns money to lenders, enabling them to make new loans to support more home purchases.
- According to the New York Fed, about 52% of all US mortgage balances — roughly $6.5 trillion — are securitized by GSEs. Because of their dominant role in the secondary market, GSEs are widely considered to set the standard for the credit scoring models used across the mortgage origination ecosystem.
- Mortgage resellers serve as a bridge between lenders and credit bureaus, streamlining the mortgage process for faster, more reliable decisions.
- Resellers help lenders by consolidating credit reports and scores from the three credit bureaus into a single merged report called a tri-merge report, giving a broader view of a consumer’s credit history.
- If the mortgage investor is a GSE, the reseller will reissue a consumer credit report into GSEs’ automated underwriting systems (AUS), such as Fannie Mae’s DU and Freddie Mac’s LPA, to ensure accurate data for loan eligibility.
- Credit model providers develop credit scoring algorithms, which are used with consumer data to generate credit scores.
- FICO® and VantageScore® are examples of these providers. Among the algorithms, the FICO Score 04 is the most widely used in mortgage as it is the historical standard Fannie Mae and Freddie Mac require to buy a mortgage from a lender.
Typical workflow for a mortgage origination
The process below relies on a highly secure and regulated infrastructure to ensure accuracy, privacy and compliance.
1. Lender requests tri-merge credit report
The consumer submits a formal loan application, and the lender initiates a credit inquiry, typically through a loan origination system (LOS) or point-of-sale platform.
2. Reseller receives request
The request is routed to a mortgage reseller, who sends a request to the three major credit bureaus to provide a credit report and credit score.
3. Credit bureaus process data
Each bureau:
- Retrieves the consumer’s credit data they have on file.
- Calculates the consumer’s credit score using the requested third-party algorithm with the consumer credit data they retrieved.
- Returns the credit score, credit report and consumer credit data to the reseller.
4. Reseller delivers report
The reseller:
- Packages the tri-merge report and scores and returns to the lender’s LOS.
- If the lender is seeking to sell to a GSE, it reissues the tri-merge report to the GSE via an automated underwriting system (AUS).
5. GSE validates and applies credit policy
The GSE:
- Runs the credit scores and other consumer credit data, income verification, the requested loan amount, and home appraisal through its AUS.
- Determines eligibility using its proprietary lending algorithm and additional data attributes from the credit bureaus, and returns a recommendation (e.g., “approve/eligible” or “refer”) to the lender.
6. Lender finalizes credit decision
If seeking to sell the loan onward to an investor, the lender receives the investor’s decision for consideration. Regardless of whether the loan will be sold, the lender will ultimately arrive at a credit decision (approve, deny or request more information), which they share with the consumer.
Why is a credit report important in this process?
Credit data, including past payment behavior, are what’s most important to the mortgage origination process, with the credit score being a numerical shorthand for that information.
When evaluating loans, lenders prioritize Debt-to-Income (DTI) and Loan-to-Value (LTV) ratios. DTI measures a borrower’s ability to repay by comparing income to existing debt, while LTV compares the loan amount to the property’s appraised value. These ratios rely on data from multiple sources: credit bureaus for debt, income verification services for earnings, the consumer’s requested loan amount, and a home appraisal for property value. Together, these metrics help lenders and investors determine risk and ensure loans meet their eligibility standards.
The credit score plays an important role in determining loan eligibility, but it is not the only key credit data element. Loan underwriting is also powered by trended credit data supplied by all three credit bureaus, which helps determine loan approval and interest rates for the consumer.
