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Frugal Homeowner®



Second Credit Check Prior to Closing Now Routine

QUESTION:  I applied for a mortgage and all seemed to be going along well.  In fact, the lender said I was “cleared-to-close”.   But two days before closing, the lender called to say that my debt-to-income ratio had changed and I no longer qualified for the mortgage.  I had to pay off a balance on a new credit card I just opened in order to be approved again.  Fortunately, the loan did close.  My question is, how did the lender know about the new debt?---RL

ANSWER:  In the old days, if the lender said the mortgage was “cleared-to-close” that signaled clear sailing to and through loan closing.  However, recent changes with secondary mortgage market giant, Fannie Mae, make eleventh-hour closing snafus much more likely, potentially invalidating the “cleared-to-close” phrase.  Re-pulling/updating credit, while done previously by some lenders, is now not only routine, but a practice designed to reduce the lender’s risk and chance of financial loss.

Termed the Loan Quality Initiative (LQI), Fannie Mae is asking lenders to take more responsibility for the quality and documentation of the loans they originate.  And if they don’t, the secondary market has the ability to refuse to buy the loan.  In other words, the lender will be burdened with a loan that can’t be sold (converted into cash) and possibly a financial loss.  Fannie Mae put the LQI in place this year in an attempt to minimize bad loans that, in the past, contributed to the mortgage market meltdown and the astronomical number of foreclosures we see today. The new guidelines are designed to shift the onus of mortgage guideline compliance away from the secondary mortgage market to that of individual lenders.

What you experienced was perhaps the most consumer-impactful part of the Loan Quality Initiative.  Prior to closing, the lender re-pulls your credit report, checks the score against the one received at application, checks for new credit obligations, and re-tallies your debt-to-income ratio. Specifically, the lender is looking for inconsistencies between your original credit picture and the updated one; the greater the increase in debt (like financing a car or other large purchase), the greater the impact on being able to financially qualify.  Changes in your financial profile can trigger the loan to be re-underwritten or perhaps denied.

Once inconsistencies are found, the lender has several options depending on what figures have changed.  For changes to debt, the underwriter can recalculate debt-to-income ratios using your new minimum payment due figures. If the ratio exceeds Fannie Mae's maximum threshold, the loan will be denied.  In your case, you were able to pay off the new debt so it no longer impacted your qualifying ratios.  If the credit score declined, the underwriter will check how it impacts the loan-level pricing adjustment.  This is the barometer that matches your credit score and risk profile with the interest rate and loan costs/fees the borrower will be charged. The lower the credit score, the higher the risk to the lender, thus the higher rate and fees.  If the new credit score falls below Fannie Mae’s minimum requirements, the loan could be denied.

In addition to checking for new credit as well as a changed credit score, the underwriter will also check to see who has pulled a credit report on you since you first applied for the mortgage loan.  This can be a red flag that you’ve applied for credit and may be in the process of taking on new debt, adding greater risk to the new mortgage.  The borrower will need to provide supporting documentation to the underwriter that proves that no new liabilities have been incurred.

The best advice for mortgage borrowers is, after applying for a mortgage loan, don’t change a thing in your financial picture.  As you found out, adding even a minimum monthly payment can push a borrower into the “can’t qualify” zone with a wide array of negative implications.


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