Article written by Dan Green:
The mortgage phrase "cleared to close" just lost most of its meaning. Lenders now have incentive to revoke a mortgage approval all the way up until the time of funding.
Scary, scary stuff.
Fannie Mae's "Loan Quality Initiative"
It's being called the Loan Quality Initiative. In an attempt to minimize "bad loans", Fannie Mae is asking lenders to take more responsibility for their files, then putting them on the hook if things go bad.
[script removed]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.
The LQI scope is broad, [script removed]taking 9 pages in summary.
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.
Beware The 11th-Hour Credit Score Repull
In the new LQI environment, Fannie Mae wants lenders to verify that an applicant's credit profile did not change while the loan was in underwriting. If the profile did change and the lender happens to "miss" it, Fannie Mae might then refuse to buy the loan, burdening the bank with a loan (and possibly a loss).
Because of this added risk, it behooves banks to take each mortgage applicant's credit report in hand, and do a complete re-pull just prior to closing.
To make sure the loan is saleable to Fannie Mae, banks will look for evidence of any of the following events occurring while the loan was being underwritten:
- 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 more recent credit report reveals inconsistencies versus the original credit report, the mortgage is subject to a complete re-underwrite and a possible 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 [script removed]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 [script removed]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 Are Tougher, But Not Impossible
The reason Fannie Mae has started its Loan Quality Initiative is to improve its loan pool's performance. Better loan quality should help keep conforming mortgage rates down while reducing the taxpayer's burden for foreclosures.
Unfortunately, it's also going to lead to more mortgage denials and a lot of busted purchase closings.
Therefore, be extra careful with your credit between the date of application and the date of closing. If you must buy something "big", consider paying cash. Anything that goes on a card can be used against you as grounds for revoking your approval.
Even if your loan is cleared-to-close.