Tuesday, May 18, 2010

Lenders likely to order second, last-minute credit report before closing on a mortgage

Changes taking effect June 1 are part of Fannie Mae’s ‘loan quality initiative’ to cut down on slipshod underwriting and fraud by borrowers.

May 16, 2010|By Kenneth R. Harney

Reporting from Washington —

If you’re thinking about applying for a home mortgage this year, here’s some important news: Beginning June 1, your lender is likely to order a second full credit sc The last-minute credit report will be designed to find out whether you’ve obtained — or even shopped for — new debt between the date of your loan application and the closing. If you’ve 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.

The June 1 changes are part of a new effort by mortgage giant Fannie Mae to cut down on slipshod underwriting by lenders and frauds by borrowers. Fannie’s so-called “loan quality initiative” will require lenders not only to pull two credit reports for each mortgage transaction but to perform additional verifications of borrower occupancy plans for the property, Social Security numbers and Individual Taxpayer Identification Numbers, among other changes.

“There’s an almost irresistible urge” for many mortgage borrowers to spend, said Don Unger, chief executive of Advantage Credit Inc. of Evergreen, Colo. “The lender says, ‘OK, you’re approved for the loan,’ and you immediately think about shopping for all the things you need for the house.”

Borrowers may go to a retailer and put in a credit application. In the past, that might not have raised an eyebrow, or even been detected. But under the new double-check policy, when the application shows up as a “hard” or borrower-initiated inquiry on a credit report, Unger said, the lender is going to have to contact the merchant and determine whether credit was extended, in what amount and how this might affect the applicant’s home-financing transaction.