Episode 30: Reviewing Credit Reports

Many note investors glance at a credit report for the FICO score and move on — but the real value is hidden in the borrower’s payment story.

In this episode, we break down how to read a credit report like a roadmap, revealing borrower motivation, true equity, and your leverage as a junior lien investor.

🔍 What you’ll learn:
 ✅ Why note investors should always perform a soft credit pull to protect the borrower’s FICO score and preserve refinance exits
✅ How trade lines and pay strings reveal borrower behavior, from consistent payments to total financial abandonment
✅ Why a senior mortgage showing a string of “ones” signals emotional equity and a borrower likely to negotiate
✅ How patterns like a rolling 30-day late borrower indicate someone struggling but still trying to keep their home
✅ How lifestyle clues — cars, credit cards, medical debt, and employment — reveal income, priorities, and negotiation leverage

This program is for informational purposes only and should be independently verified before taking action.

Transcript

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Welcome to the show, where you'll learn how to invest in mortgage notes, the savvy real estate investor's secret weapon to create cash flow without tenants and property acquisitions for pennies on the dollar. My name is Robert Haitha, founder of Fix Notes, and my mission is to make note investing ethical, profitable, and accessible for you. In every episode, we're democratizing the industry to put these powerful Wall Street assets into the hands of mainstream investors like you. So without further ado, let's get into the show where you're in good hands with my AI clone. Let's go. This program is for informational purposes only and should be independently verified before taking action. When we talk about reviewing credit reports in the mortgage note business, we are really talking about reading the story of the borrower's life. If the property is your safety net, the credit report is your roadmap to a resolution. For a junior lien investor, this is arguably the most important piece of due diligence you will ever perform because it tells you exactly where you stand in the priority line and what the borrower is thinking. The first thing you need to understand is permissible use. As a note buyer or lender, you have a legitimate economic interest in the borrower's financial situation. This means you have the legal right to pull a credit report as part of your underwriting or debt collection process. However, you must ensure you are doing a soft pull rather than a hard inquiry. A soft pull does not affect the borrower's FICO score, whereas a hard inquiry can knock points off their score and potentially hurt their ability to refinance, which is often your best exit strategy. You want their credit score to stay as high as possible. When you open that report, do not just look at the FICO score and move on. In fact, some of the most successful node investors say the FICO score is one of the least important numbers. You are looking for the trade lines. Every single debt the borrower has is listed there. From their primary mortgage to their auto loans and credit cards. Each trade line has a pay string, which is a series of digits representing the last several years of payment history. In our world, a one means the account is current and paying as agreed, a two means they are 30 days late, a three is 60 days late, and a five typically means they are 120 days late or more. If you are buying a second mortgage and you see the senior lien trade line is a string of ones, you should be doing a happy dance. That tells you the borrower is highly motivated to stay in the home. They are making that first mortgage payment every single month because they want to keep the roof over their heads. If they are paying the first, they have what we call emotional equity, and they are much more likely to work out a deal with you to save their home from a second lien foreclosure. You also want to look for patterns like a rolling 30. This is where you see a bunch of twos in a row. It means the borrower is making a payment every month, but they are consistently one month behind. They are struggling, but they are trying. That is a very different borrower than someone whose pay string is a series of fives, which indicates they have completely walked away from the obligation and a senior foreclosure is likely already in the works. The credit report is also how you calculate your actual equity. You take the current senior balance and add the past due amount listed in the trade line to get the total senior payoff. Subtract that number from the property value, and that is your equity cushion. If you see that the senior balance is being paid down every month, your position is getting safer every single day. But there is more to the story than just the numbers. Skimming the credit report tells you about the borrower's lifestyle. I've seen reports where a borrower has a Porsche and a Mercedes Benz on their credit, but they are not paying their$5,000 second mortgage. That tells you they have the money, they just have poor priorities. So that is a borrower you can negotiate with because you know they have the income to support a settlement. On the flip side, if you see massive medical debt or a stack of maxed-out credit cards, you know you are dealing with someone who is truly overextended and maybe headed for bankruptcy. The credit report also reveals occupancy and employment. If the current address on the credit report matches the property address, that is a solid data point for your occupancy triangulation. If they are listed as self-employed or working at a local firm, it gives you a better sense of their stability. Finally, remember that credit is a powerful tool for leverage. If you work with a loan servicer that reports to the bureaus, you can use that as a stick. You can tell a borrower with a decent credit score that their delinquency is going to haunt their FICO score for seven years unless they get a modification in place. On the other hand, you can use it as a carrot. And once they get back on track, you can provide a credit support letter to help them prove to the bureaus that the debt is now in good standing. Now that you have looked into the borrower's financial past and present world through their credit, you need to know what happens if they try to hit the reset button on all their debts. Next time, we are diving into chapter 13 versus chapter 7 bankruptcy. Thanks for sticking around to the end and thank you to my trusty Robot and the Fixed Notes team for putting together another episode. If you want to learn more and hang out with the real, not AI version of me, join our free school community at school.com slash fixed notes. That's s k-o-l.com slash f I X N O T E S. In the meantime, we'll see you in the next episode.