Effective June 1, 2010 Fannie Mae's new Loan Quality Initiative(LQI) mandates that lenders tighten up their underwriting in an effort to cut down on fraud. As a result lenders may pull a last minute credit report on borrowers just days before their scheduled closing!
The last-minute credit report will be designed to find out whether a borrower has obtained - or even shopped for - new debt between the date of the loan application and the closing. If borrowers have made applications for credit of any type - for furnishings and appliances for the new house, a car, landscaping, a home equity line, a new credit card - the closing could be put on hold pending additional research by the lender.
If you've taken out new loans that are sizable enough to affect the debt-to-income ratio calculations used in your original mortgage approval, the deal could fall through. The added debt load could render you ineligible for the mortgage because you suddenly appear unable to handle the payments without a strain on your household budget.
Many lenders already pull second credit reports right before the closing, but the Fannie Mae mandate will likely result in a markedly increased number of lenders pulling second credit reports and performing other last minute verifications.
Borrowers should be counseled to avoid obtaining or applying for new credit, or even increasing utilization of existing credit, before their closings. Lenders may view this added debt as a strain on a household budget sufficient enough to make a once qualified borrower now appear unable to handle the payments. If these new loans are sizable enough to affect the DTI (debt-to-income) ratio calculations used in the original mortgage approval, then the deal could fall through.
In a standard contract of sale a buyer may be forced to forfeit his deposit if he loses his financing just days before the closing so attorney's may want to start addressing this on behalf of their clients.
In the end, the best advice may just be avoidance; borrowers will be best off not obtaining any additional credit in the time between the application for a mortgage and the date of closing.
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