The lending world just keeps getting tougher.

As of June 1, 2010 FNMA guidelines now require lenders to pull a new credit report right before closing a loan in addition to the credit report pulled at application.

This new required practice will take some time for homebuyers and industry professionals to get used to.  Unfortunately, it’ll become more common for purchase transactions to fall apart at the last minute.

How?

Let’s say a homebuyer barely has the credit score required to qualify for their mortgage.  They get pre-approved for a conforming mortgage, find a home they like, sign a purchae contract and apply for their mortgage.  So far, so good.  Then, sometime during the approval process, they innocently charge a tank of gas for their car on a credit card.  That small transaction could drop their credit score enough to kill their deal.

Or a homebuyer could go out and open a new account at Best Buy and purchase their new appliances ahead of time.  The additional credit payments could exceed the debt tolerance they were initially approved for and again kill their transacation at the last minute.

The least controllable situation – the new credit report pulled before closing discloses something a homebuyer did BEFORE they even applied for their mortgage.  It’s easy to forget that information can take up to 90 days to appear on a credit report.  So, an innocent credit transaction leading to an increased balance could pop up  and kill a transaction.

So homebuyers need to be VERY prudent about what they do with their credit when buying a home.  Here are some tips:

• Turn in all your credit card statements from the last 90 days when applying for a mortgage.
• Review your credit report with your Loan Officer and compare what’s reported to what’s on your credit card statements.
• Consider paying down account balances where there’s a discrepency.
• Disclose any recent new credit accounts opened or large charges.
• If you’re credit is borderline, consider an FHA mortgage (which isn’t requiring the additional credit pull yet)
• Be very careful with the use of credit accounts before the closing of your home purchase.

Real estate agents also need to be more aware of this new requrement and start educating homebuyers about it as soon as they start showing them homes.  There will definitely be transactions affected, but throwing a temper tantrum and making the problem 100% the lender’s fault will not solve anything.  Be professional and part of the solution, not part of the problem!

I do not wish that ugly situation on anyone and I’m dreading when it occurs on one of my transactions.

A more in depth explanation of the new requirement

It’s important to note that FNMA hasn’t come out and required lenders to pull new credit reports right before closing.  What they’ve done is introduce a new requirement called, “Loan Quality Initiative” (LQI) and that is forcing lenders to take this action to meet the LQI requirements.  

Here’s the language from FNMA leading to lenders pulling new credit reports right before closings:

Lender must determine that borrower liabilities incurred up to, and concurrent with, closing are disclosed and evaluated in qualifying the borrower for the loan. 

Why is FNMA doing this?  Well here’s as excerpt from FNMA’s announcement 2010-03 about LQI released February 26th that supposedly explains why: 

Historically, many issues related to compliance with Fannie Mae selling policies are not detected until after loans are delinquent or through the foreclosure process. Loan repurchase requests to lenders have increased in the past three years, highlighting the need for an improved approach for working with lenders to deliver loans that meet Fannie Mae’s underwriting and eligibility guidelines. Fannie Mae conducted an extensive analysis to determine the primary drivers of repurchase requests and is launching the Loan Quality Initiative (LQI) to identify and implement policy, process, and technology enhancements to improve the compliance with underwriting and eligibility guidelines and mitigate repurchase risk. 

Working with its lender partners, Fannie Mae is implementing the LQI enhancements to promote improved loan delivery data that is complete, accurate, and fully reflective of the terms of the mortgage. The LQI will also help ensure that the loan meets the credit and eligibility standards, pricing guidelines, and other requirements of the Selling Guide or negotiated variances. A primary focus is on capturing critical loan data earlier in the process and validating it before, during, and immediately after loan delivery. 

This updated approach is designed to stand the test of time across market cycles and risk tolerances, thus supporting market stability and reducing investor and lender risk. Changes introduced under the LQI are intended to reduce repurchase requests through improved data integrity and consistent and early feedback on policy compliance while maintaining the current business model of relying on lenders to make appropriate decisions in accordance with Fannie Mae’s guidelines.

The announcement actually covers a lot more items than just pulling new credit before closings. 

Lenders now also have to:

• Confirm the identity of all borrowers
• Verify all borrowers have a valid social security number
• Verify a borrower intends to owner occupy a property
• Validate all parties to a transaction and make sure they’re not on any government exclusion lists
• Reporting & validation of mortgage insurance coverage
• Credit scores must be 620 or higher (with some exceptions)
• ..and more.

FNMA’s vagueness about LQI caused such an uproar in the industry that they had to release a clarification statement March 29th.

Oh but wait, it get’s better!  Because their bureaucratic mumbo jumbo is so clear, FNMA had to publish additional clarifying statements on April 7th and again on June 7th. 

FNMA has also created an index page on their website to assist lenders with understanding what they’re after.

Is it any wonder why it’s seems so difficult to get approved for a mortgage these days? 

MORTGAGE, EXPERT, MICHIGAN, BIRMINGHAM, BLOOMFIELD, DETROIT, ROCHESTER, ROYAL OAK, TROY