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.
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.