For those who consider on taking out a home mortgage, here is a bit of important update you need to know: lenders might order another full credit screening right before closing a loan starting June 1.
Lenders will obtain the second report to determine whether applicants have already obtained or still actively look for new loans from the date of their loan application to the date of closing. If you applied for credit of any kind — for instance, taking out a loan for a new car or getting a new credit card –- your lender could put your mortgage application on hold until they conduct further research.
Your mortgage can also be rejected if you have taken a loan that could substantially affect the debt-to-income ratio indicated in your application. The additional debt can make you ineligible for the loan because it compromises your ability to make payments.
Mortgage leader Fannie Mae will implement these changes starting June to encourage high quality loans and minimize fraud and slipshod underwriting. The company’s ‘loan quality initiative’ requires lenders to obtain two credit reports for every mortgage application. According to the Washington Post, this initiative also requires verifications about each borrower’s plans for the properties covered by the loan, individual taxpayer identification and social security numbers.
According to Don Unger, CEO of Colorado-based Advantage Credit, most mortgage borrowers have the tendency to go shopping for things that they need for their new home as soon as the lender approves their application. They put in another application for a loan from major home improvement retailers.
This may have been considered something common among many borrowers and wouldn’t have warranted a second glance. But under the new policy, an application with Home Depot or any other major retailer in the area will reflect on the credit report as a borrower initiated inquiry. Lenders will need to contact the retailer to find out whether the credit application was approved and for how much. They also have to determine how the new transaction would affect the home mortgage the borrower applied for.
For Marc Savit, mortgage broker in West Virginia and president of the National Association of Independent Housing Professionals, such is quite common as many people will need to take out a new loan to purchase things that they need around the house. He added, however, that there are cases where in the borrower also takes out a new debt for a new vehicle or any other purchase.
There are even cases where home buyers went all out, incurring debts for as much as $40,000 worth of home furnishings and other items after they got their loans approved. This translates to a substantial increase in their monthly payments, more than what they can comfortably afford. With the new policy in place, applications from borrowers with this kind of activity will be shot down before the deal closes.
Fannie Mae representative Janis Smith added that lenders have to check out other details such as increased credit lines, new credit accounts, increased balances on current accounts and undisclosed or new second mortgages acquired. These and other similar transactions could impact the loan applicant’s debt-to-income ratio.
Some lenders request credit reporting agencies to conduct investigations each time the borrower incurs new debt. Fannie Mae’s instructions are for lending agencies to identify all the debts that the borrower has incurred before closing. Lenders must consider these transactions in the final loan analysis.
Unger adds, however, that this practice is not as simple as it may seem. For instance, if the lender acquires the credit report right before closing, there may not be enough time to verify the entries particularly for instances where the national credit bureaus have not yet received an actual drawdown of the consumer’s debt. Unger also asked about the possibility of re-underwriting the loan packages according to the new credit information – a task that can take so much time.
In any case, you may very well kiss your loan goodbye after that.
For creditors and credit reporting agencies, everyone looking to take out a mortgage just have to live by one rule: abstinence. From the time of your loan application to the closing date – a period that may take from one to two months – it’s better to avoid applying for another credit. If you have to, consult with your lender first to make sure that your loan application will not be affected.
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