Fannie Mae's New Credit Check Rules Required Just Before Closing

Here some clarity on the new Fannie Mae Loan Quality Initiative (LQI) requirements that went into effect at the beginning of June.
 
Fannie's LQI is requiring lenders to pull a credit report just before closing in an attempt to identify any new credit or debt the customer has taken on since they applied for the loan.
 
The good news is lenders will be pulling abbreviated credit report transcripts that will not provide credit scores -- just new credit inquiries and all the current liabilities.
 
That's vital as credit score fluctuation would have potentially wreak havoc by increasing borrowers costs or worse, blowing up purchase deals at the 11th hour.  For now, credit scores  pulled earlier in the process by the lender -- as long as they are less than 90 days old by the time the loan funds -- will be used.
 
MORE GOOD NEWS
Fannie also will allow a small variance - up to 2 percent -- in the total debt-to-income ratio. Best of all, the loan won't have to go back through Underwriting unless it eclipses this threshold.
 
Still Fannie Mae's LQI will still be a potential nightmare for those who apply and/or obtain new credit between the time they apply for a loan and close on a purchase.
 
REAL WORLD EXAMPLE
I had a customer meet with me this week because a major bank with a local branch refused to approve the condominium complex for the purchase (despite the fact the complex meets Fannie Mae's current condo guidelines - see item below).
 
The customer had not been told by his loan officer to not apply or obtain any new credit after the customer had applied for a new home loan.  After the customer had been credit approved by the mega-bank, the customer went out a bought a new vehicle, complete with a $400 monthly payment on his new loan.
 
Unfortunately this pushed the customer's debt-to-income ratio above Fannie's current maximum DTI threshold of 45%.
 
Luckily the customer had enough funds to pay of a loan that got rid of another large monthly payment and his DTI drop just below that 45% threshold.
 
But can you imagine what would have happen at closing if the mega-bank pulled a credit report just before preparing his loan docs? It would have been an 11th hour nightmare.  It would have been fixable, but at best the closing would have been delayed and this particular customer would have been out a $8,500 first-time home buyer tax credit if that happened.
 
WARN YOUR BUYERS
Lenders and Realtors together today must both emphasize in the strongest terms to homebuyers that buyers should not apply for ANY new credit and take on as little new debt as possible until after their loan closes. Even customers with low DTIs would likely experience a delay in closing delayed if they don't heed this warning.