The closing date on the new home that you put a purchase agreement on is coming up and you've been approved for a loan. You were given a decent rate, and you think you're all set to go.
After you were approved for the loan, your credit took a hit because you financed a new car and put some purchases on your credit cards. You're not too worried about it because your credit has already been checked, and you got the rate you were hoping for. Nothing to worry about – right? Maybe not.
Fannie Mae has put out new lending guidelines called their “Loan Quality Initiative”, which means that lenders have incentive to revoke a mortgage approval, right up until the time the loan is funded at closing.
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Fannie Mae's Loan Quality Initiative
This program that Fannie Mae is putting out is being called the Loan Quality Initiative and it is their attempt to try and minimize the bad loans that have become so common since 2007. Fannie Mae is asking lenders to take more ownership for the loans that they give, and is then giving them the responsibility if things go bad. From themortgagereports.com
The Loan Quality Initiative is Fannie Mae's response to the foreclosure surge since 2007. The program shifts the onus of mortgage guideline compliance away from the the government-backed group and to the individual banks responsible for making loans…
For the most part, mortgage applicants won't be bothered with the changes. It's just extra work for the bank. Things like Social Security Number validation checks and borrower occupancy standards.
There is, however, one major consumer hurdle.
The hurdle? The last minute credit check!
Credit Checks Right Before Closing
Normally the loan process works like this:
Apply For The Loan – Credit Check – Underwrite & Approve – Fund Loan.
Because of the Fannie Mae Loan Quality Initiative the process is changing for many borrowers – there is an added credit check right before the loan is funded.
Apply For The Loan – Credit Check – Underwrite & Approve – Credit Check – Fund Loan.
The reason for the added credit pull? Fannie Mae wants lenders to verify that an applicant and their credit profile doesn't change while the loan is in underwriting. If the profile does change Fannie Mae may refuse to buy the loan from the bank because of the added credit risk. That means the bank is on the hook for that loan, and they don't want that.
Things That Will Be Looked At
To make sure the loan can be sold to Fannie Mae, banks will be looking for the following events occurring after the loan was underwritten:
- Are there new credit cards?
- Do existing cards have new charges on them?
- Were there any major purchases financed since the loan was approved?
If there have been changes since the original credit pull the mortgage may need to go through the underwriting process again – and it could be subject to being turned down. Even if it isn't turned down, it could result in the borrower paying a higher interest rate on their loan because their credit situation has changed – for the worse.
If You're Trying To Buy A House – Be Careful
Fannie Mae's Loan Quality Initiative is meant to improve Fannie Mae's loan pool, decrease defaults and reduce the burden that foreclosures is putting on the taxpayers.
Trying to be more responsible about the loans they give isn't necessarily a bad thing, but it does mean that you need to be extra careful when you're in the process of buying a home.
In other words while you're in the process of buying a home don't sign up for new credit cards, don't put new charges on existing cards, and don't make any major purchases unless it's done with cash. In other words – don't do much of anything that might show up on your credit report because it could mean that your loan will be denied – even if your loan was already cleared to close beforehand.
What do you think of the new Fannie Mae initiative? Is it a good thing in the long run? Will it cause you to be more careful when buying a home? Tell us your thoughts in the comments.
I think the new procedure just confirms what I’d been told before we closed on our home — that the lender may or may not check your credit one more time before the closing, so don’t do anything stupid. So I think some lenders were already following a similar policy. To make sure we didn’t get hit with a last-minute interest rate increase (or have to go through the underwriting process again), we didn’t buy anything major in between getting approved for our mortgage and the closing.
I think it was in Dale Siegel’s The New Rules for Mortgages where she talks about not doing anything like buy a new car right before closing. Seems it’s common for people when buying a house to purchase a new car before their close (maybe it’s moving out to the suburbs or something). As you can guess, buying the car dings the credit report and for some people it puts their mortgage in jeopardy.
I’m sure many people open up credit cards and consumer accounts to buy stuff like furniture and appliances too!
You make a good point – I’m sure a lot of people are opening lines of credit to improve the houses they just bought or opening credit cards to buy furniture and so on. Seems that it could be an issue though, and something you’ll want to put off.
Overall, this is probably a smart move for the economy.
However, I’m curious, if your credit goes down slightly (but not enough to warrant the lender from backing out), could they adjust you to a worse interest rate (or threaten backing out if you don’t agree to an adjustment)?
I’ve heard of some doing just that because it drops them to a lower credit tier- meaning a higher interest rate.
i am bout to close on my house. I recently received a phone call that they will be doing another credit check before i close. I recently went to a car dealership to look for a new car. They dealer knows me from my previous purchase of a car like 2 years ago. i told them i wasnt buying. but 2 days later i received a credit alert saying that they check my credit. i didnt told them to do that, and they my previous info from last time to do it. will this affect my closing on my house?
I charged 700 dollars on a credit card (already on the credit report) in the last three months but my balance is still less than 20% of the limit. I know better than to buy anything but things come up that’s life. But I noticed on the GFE that there was a credit card that doesn’t belong to me has a higher balance and two accounts that have zero balances now. Should I be worried? I have a couple of weeks I can pay the balance down before then but honestly I always credit cards like that within a year.
I`m about to close on a home purchase and received a letter for a medical bill that if not paid will go against my credit report,,will the bank refuse to give me a loan cause of this medical bill? thank you.