New Credit Before Closing Could Kill Your Loan Approval
August 30, 2010
We have been saying for years for customers to not open new credit during the mortgage process. This becomes even more important as we move forward in time. I wanted to clarify the new quality initiative after this past Sunday’s article in the observer. The article stated that credit does not need to be re-pulled and this is true; however, all lenders are moving to credit monitoring services and if significant changes are made to a client’s credit profile a new report will have to be pulled. The reason is spelled out below. Bottom-line do not let your client open new credit until the loan is funded. This applies to even Jumbo borrowers with excellent credit, income and assets – there is a good chance any new credit will delay closing.
Fannie Mae's "Loan Quality Initiative"
It's called the Loan Quality Initiative. In an attempt to minimize "bad loans", Fannie Mae has told lenders to take more responsibility for their files, and has put them on the hook if loans go bad. The Loan Quality Initiative is Fannie Mae's response to surging foreclosures. The program shifts the onus of mortgage guideline compliance away from the government-backed group and to the individual banks responsible for making loans.
There is, however, one major consumer hurdle. And it's a doozy.
Beware the 11th-Hour Credit Score Re-pull
In the new LQI environment, Fannie Mae has lenders that an applicant's credit profile did not change while the loan was in underwriting. If the profile did change and the lender "misses" it, Fannie Mae can then refuse to purchase the loan for securitization, burdening the bank with loan on its books (and possibly a loss).
Therefore, it behooves banks to take each mortgage applicant's credit report in hand, and do a complete re-pull just prior to closing -- just to make sure nothing changed.
Banks wants Fannie Mae to buy their loans so they're looking at the re-pulled reports for evidence of any of the following events that might have occurred while the loan was in underwriting:
Did the applicant apply for new credit cards?
Did the applicant run up existing cards?
Did the applicant finance an automobile, or other major purchase?
If the updated credit report doesn't match the original credit report, the mortgage is subject to a complete re-underwrite and a possible loan turndown.
The 3 Things An Underwriter Will Scrutinize
When banks re-pull credit just prior to closing, there are 3 things for which an underwriter is looking, and specific actions the bank will take.
What the bank will do: Recalculate debt-to-income ratios using your "new" minimum payment due figures. If the DTI exceeds Fannie Mae's maximum threshold, the loan will be denied.
What you should do about it: Don't run up credit cards prior to closing -- even for layaway items. Consider paying more than the minimum due, just in case.
What the bank will do: Use your new credit score to assess loan-level pricing adjustments or outright denials for when scores fall below Fannie Mae's minimum credit score requirement.
What you should do about it: Follow the basic rules of keeping your credit score high -- pay your bills, don't let things go into collection, and don't look for new credit unless necessary. myFICO.com has a terrific series on credit scoring you can review.
What the bank will do: Look at the Credit Inquiry section of your credit report to look for "non-disclosed liabilities". If items are found, the bank will ask for supporting documentation on the inquiry, and will use the information to re-underwrite your mortgage.
What you should do about it: Don't go looking for new credit until after your loan is funded. Period. Now re-read that first sentence, please, to help it sink it.
And remember -- this is all happening after your loan has reached "final approval" status.
Loan Approvals will not be final until they are final.
Fannie Mae started its Loan Quality Initiative is to improve its loan pool's performance. Better loan quality can help keep conforming mortgage rates down and reducing taxpayer burden from foreclosures simultaneously. That's two big wins.
Unfortunately, the LQI will also lead to additional mortgage turndowns and a lot of busted closings.
Be extra careful with credit between your application date and your closing date, therefore. If you must buy something big, think about paying cash. Anything that goes on a card can be used as grounds for revoking an approval; even if your loan is cleared-to-close.
Make sure to let your buyer know about these new rules – they need to know not to buy items with new credit or run-up existing credit lines until after closing.
All our best for the upcoming week.
@ The Valeo-Croy Team, we are here for you.
The Valeo-Croy Team - (704) 366-7711
Todd Croy - NMLO license #91428
Deanna Valeo - NMLO license #91421
Accessible | Program Expertise | On-Time Closings
The Valeo-Croy Team and Cunningham and Company Mortgage Bankers are Equal Housing Lenders.
This information is for illustration only. It does not constitute an application for a loan or an offer or commitment for Cunningham and Company to make a loan on these terms. Interest rates are subject to change until an application is completed and you lock in your interest rate. The figures noted are estimates and may vary depending on discount points, taxes and insurance. Programs, terms and conditions are subject to change without notice. Mortgage loans are subject to credit qualifications. Normal credit standards apply. Date: 8/30/2010
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