Question: Why are some lenders pulling another credit report before funding a loan? Could that prevent a loan from closing?
Answer: Undisclosed Liabilities – Fannie Loan Quality Initiative FAQ (5/28/10 & 6/7/10) the boring title for another exciting change in our industry. (Think positive thoughts)
Before you pound your head on your desk, keep in mind this is for Conventional loans only, not FHA, VA or USDA. At least for today. The typical Conventional loan buyer has money to put down, a higher credit score and is usually not a first time home buyer.
Fannie is checking for a couple of things:
- The usual suspects of purchased items such as a car or furniture or appliances with the debt not disclosed to the underwriter. (This could compromise debt to income ratios)
- A buyer/investor double dipping: purchasing two houses at once from two different lenders without disclosure (This is the “F” word, Fraud.)
- Buyer’s that are retaining another home, verifying the house payments are being made on time after loan approval (I promise I’m keeping my home as a rental!)
This new guideline states that it is up to the lender to determine if there has been any undisclosed debt during the transaction. The lender is responsible for implementing practices to identify undisclosed liabilities to meet Fannie Mae’s requirements.
Some banks have checked credit again before funding for years. Now they may expand it to include all three credit scores.
The material change is the credit score. Up until the past year, if the score dipped a little it would not compromise the interest rate. That is so 2009. Lenders are trying to read Fannie to see if a scoreless “soft” credit report (a.k.a. – a Decision Report) will suffice. This type of report has no scores and updates all relevant information in order to comply with Fannie LQI requirements. But the banks may not accept a scoreless update and if the scores have modified before funding, then things will get spicy.
What does that mean for us? Well, agents we need your help. Your loan officer should tell your buyer they are going to mortgage jail. They need to lock up their credit cards and keep usage down to a minimum; stay on house arrest to prevent visiting the malls or car shopping. No purchases unless it is approved by the loan officer. NO APPLICATIONS FOR ANY CREDIT. No credit inquiries until the transaction closes, they have their keys, and HUD-1 in their hand. And this includes buyers waiting for short sales.
Our borrowers are our biggest challenge. Counseling from different sources may be the only way to get them to understand. Or their transaction may not close.