Underwriting & Reading a Credit Report

Underwriting & Reading a Credit Report
A comprehensive guide to understanding the underwriting process, evaluating creditworthiness, and analyzing credit profiles for lending decisions.
What is underwriting
In lending, underwriting refers to the process of evaluating the creditworthiness of a borrower. This includes reviewing the borrower's credit history, income, debt levels, and other factors to determine whether they should be approved for a loan, as well as the interest rate and repayment terms.
Underwriting is the process by which a financial institution, such as a bank, assesses and evaluates the risk of lending money to a person or entity. The underwriter reviews various factors to determine the terms, conditions, and pricing of the insurance policy, loan, or investment.
3 C's of funding
Cash
Liquid assets and cash flow available to support the loan
Credit
Credit history, score, and borrowing track record
Collateral
Assets that can secure the loan and reduce lender risk
If you don't have one, you'll have to rely on the others. If you don't have 2, you'll have to heavily rely on the other.
Debt to income (DTI)
DTI is a financial ratio that compares an individual's total monthly debt payments to their gross monthly income. It's used by lenders, such as banks or mortgage companies, to assess a borrower's ability to repay a loan. A lower DTI indicates that a person has a manageable level of debt relative to their income, while a higher DTI suggests they may have trouble handling additional debt.
The formula to calculate DTI is: (Total Monthly Debt Payments / Gross Monthly Income) * 100
For example, If you have $2,000 in monthly debt payments (mortgage, car loan, credit card payments, etc.) and a gross monthly income of $6,000, your DTI would be:
2,000 / 6,000 x 100 = 33.33%
Why is DTI important?
Lending Decisions
Lenders use DTI to gauge a borrower's ability to repay. A high DTI may make it more difficult to get approved for a loan because it signals a higher risk of default.
Financial Health
A high DTI suggests that a person may be overleveraged and could struggle to meet future financial obligations.
General DTI Guidelines:
Conventional loans: Typically, lenders like to see a DTI below 36%, but some may allow up to 43% depending on other factors.
Government-backed loans: For FHA loans, for example, the DTI may be higher (up to 50%) depending on the borrower's circumstances.
Profitable cashflow
A 3 to 6 month window is often considered enough to gauge the borrower's financial resilience and to give some assurance that they are capable of repaying the debt.
Put simply: is more coming in than going out?
Demonstrates financial stability, ability to repay debts, seasonal variability and effective cash management. Mitigating lender risk.
Reading a credit report: Bad profiles
At a glance
Account summary
Open accounts: 15
Self-reported accounts: 0
Accounts ever late: 0
Closed accounts: 0
Collections: 0
Average account age: 4 yrs 5 mos
Oldest account: 8 yrs 3 mos
Overall credit usage
Usage: $97,652
Credit limit: $91,080
Debt summary
Credit card and credit line $97,652 
Self-reported account balance $0
Loan debt $32,387
Collections debt $0
Total debt $130,039
At a glance
Account summary
Open accounts: 17
Self-reported accounts: 0
Accounts ever late: 12
Closed accounts: 0
Collections: 2
Average account age: 5 yrs 4 mos
Oldest account: 10 yrs 1 mo
Overall credit usage
Usage: $22,974
Credit limit: $25,250
Debt summary
Credit card and credit line $22,974 
Self-reported account balance $0
Loan debt $47,593
Collections debt $4,235
Total debt $74,802
Reading a credit report: Thin profiles
At a glance
Account summary
Open accounts: 3
Self-reported accounts: 0
Accounts ever late: 0
Closed accounts: 0
Collections: 0
Average account age: 7 yrs 10 mos
Oldest account: 12 yrs 10 mos
Overall credit usage
Usage: $3,793
Credit limit: $49,300
Debt summary
Credit card and credit line $3,793
Self-reported account balance $0
Loan debt $0
Collections debt $0
Total debt $3,793
At a glance
Account summary
Open accounts: 2
Self-reported accounts: 0
Accounts ever late: 0
Closed accounts: 0
Collections: 0
Average account age: 5 yrs 7 mos
Oldest account: 9 yrs 10 mos
Overall credit usage
Usage: $2,607
Credit limit: $1,300
Debt summary
Credit card and credit line $2,607 
Self-reported account balance $0
Loan debt $0
Collections debt $0
Total debt $2,607
Reading a credit report: Optimal profiles
At a glance
Account summary
Open accounts: 7
Self-reported accounts: 0
Accounts ever late: 0
Closed accounts: 0
Collections: 0
Average account age: 10 yrs 3 mos
Oldest account: 17 yrs 4 mos
Overall credit usage
Usage: $34,909
Credit limit: $39,100
Debt summary
Credit card and credit line $34,909 
Self-reported account balance $0
Loan debt $18,196
Collections debt $0
Total debt $53,105
At a glance
Account summary
Open accounts: 17
Self-reported accounts: 0
Accounts ever late: 0
Closed accounts: 0
Collections: 0
Average account age: 3 yrs 5 mos
Oldest account: 7 yrs 8 mo
Overall credit usage
Usage: $1,032
Credit limit: $22,300
Debt summary
Credit card and credit line $1,032
Self-reported account balance $0
Loan debt $29,123
Collections debt $0
Total debt $30,155
What is an ideal credit profile
Credit monitoring
EVERYONE needs credit monitoring (myfico is the best)
Strong Profile Requirements
A strong credit profile has a 680+ credit score, 0 to very minimal hard inquiries in the last 6 months, 2+ years of credit age (5+ is ideal), no derogatory marks (late pays, collections, etc), has 3 or more primary accounts reporting, $10,000 or more in personal credit and a good mix of credit.
Lender Appeal
This will have you in an excellent position in the eyes of any lenders who look at your credit profile. They will beg to offer you stuff.
Credit monitoring
Resources:
MyFreeScoreNow
MyFICO
Experian
There are a lot of options for this. Everyone needs monitoring. Make sure it's accurate and shows all 3 bureaus.
If you can pay for netflix, you can pay for credit monitoring.
3 C's of funding
If this, then that
Cash
Do they have at least 3-6 months of profitable statements?
Credit
Do they have a 680+, 2+ years history, 5+ primaries, at least $10,000 in personal credit?
Collateral
Do they have accounts receivable invoices, equipement, investments, real estate, etc?
This is a thousand foot view, it gets much deeper than this. For general purposes and most of your use cases, this is plenty.