Monday, June 21, 2010

THE HOME FRONT: BUYERS BEWARE OF THE LAST-MINUTE CREDIT

When it comes to managing debt, even the savviest American home buyer can be a rank amateur.

Take the hypothetical example of Betty Buyer, a novice Chicago-area home purchaser who failed to pay her credit card debt on time on the same month the closing was scheduled on the purchase of her new house.

Betty said it was a dumb, but honest mistake. She was expecting a hefty income tax refund check from Uncle Sam and planned to pay off her credit cards in full after the closing.

Meanwhile, the ever-watchful mortgage lender said her credit score slipped below 620 because of the failed credit-card payment and now she couldn’t qualify for the FHA-insured loan.

A new loan-quality initiative from Fannie Mae is making it harder for home buyers and homeowners planning to refinance to close on a mortgage, warned Brian Weis, vice president of mortgage lending for Guaranteed Rate, a Chicago-based lender.

“Beginning June 1, 2010, with all new applications, Fannie Mae wants lenders to verify that borrowers have not taken on new debt during the underwriting phase of the mortgage,” Weis said. “If new debts are found, the mortgage is subject to a re-underwrite and a possible turndown.”

For Fannie Mae, the goal is to reduce the number of loans that go bad because of new, non-disclosed debt.

Lenders have the freedom to verify in whatever manner they wish, but in most cases, the verification process will amount to a last minute credit check made just prior to closing.

Weis said Freddie Mac loan underwriters will continue to scrutinize loan packages looking for the following three key items in particular—even after the loan is approved:

• First, your updated credit report will show your current credit-card bills and minimum monthly payments. Those numbers will replace your original numbers made at the time of application. If the debts exceed a certain threshold, your loan will be denied.

• Second, underwriters will be looking at your updated credit score. If your FICO has dropped below minimum lending standards, your loan will be denied. Or, you may be subject to a new loan-level pricing adjustment. A loan-level pricing adjustment means a mandatory loan fee likely will be charged based on your credit score.

• And, lastly, underwriters will be looking at your credit report’s Credit Inquiry section. The goal is to see if you’ve been applying for credit elsewhere. Underwriters can use this information at their discretion.

“Fannie Mae’s Loan Quality Initiative is just one more way that the government-backed group is trying to improve its loan pools,” Weis said. “Unfortunately, it’ll mean more turndowns for mortgage applicants.”

That’s why it is important to take extra care of your credit between the time you apply for a mortgage and the closing date, Weis advises. “Don’t buy new cars, don’t buy new appliances, and — most definitely—don’t open new credit cards,” he said.

Be extra careful with your credit because a mortgage application that’s supposedly cleared-to-close can be revoked at the eleventh hour, Weis warns. “When in doubt, talk to your loan officer about what may or may not trigger the Loan Quality Initiative. Your loan approval is at stake,” he said.