Buyers and their agents need to be aware that it is a very bad idea for buyers to increase their credit balances or to open new lines of credit shortly before they close escrow on their new home. More specifically, they should avoid such activity during the period of time between loan application and closing. This is because policies under Fannie Mae's Loan Quality Initiative, effective June 1, 2010, requires lenders to "refresh" a borrower's credit report just prior to closing.
Here's what happens: Bill and Betty Buyer are excited to make an offer on a home they just love. They realized that they are stretching, but the loan officer has pre-qualified them and is confident that they will receive full loan approval. When formal loan approval comes, then, they are ecstatic. In eager anticipation of closing, they visit their favorite furniture store and purchase (that is, charge) a new bedroom set, dining room furniture, and a sectional that will be perfect for the family room. It all adds up to a pretty penny, but they are confident that they will be able to pay it off in a timely manner. Things are going well at work. What could go wrong?
Well, here's one thing that could go wrong: Following FNMA's guidelines, the lender runs an updated credit report on Bill and Betty just before closing. With their newly-acquired credit balance, Bill and Betty no longer meet the required debt-to-income (DTI) ratio in order to qualify for their loan. The loan is pulled. Sadness reigns.
Fannie Mae's Loan Quality Initiative was introduced in a lender letter February 26, 2010. The letter noted that, during the past three years, the need had been highlighted "for an improved approach for working with lenders to deliver loans that meet Fannie Mae's underwriting and eligibility guidelines." In other words, the loans that had been delivered to Fannie Mae turned out too often not to meet Fannie Mae guidelines. Regrettably, this tended to be discovered well after Fannie Mae had purchased the loan. The idea of the Loan Quality Initiative, which was to become effective June 1, 2010, was to focus "on capturing critical loan data earlier in the process and validating it before, during, and immediately after loan delivery."
Borrower qualification was not the only issue of concern. Among others were determining owner occupancy, verification of social security numbers, a new policy on excluding certain entities from Fannie Mae loans, and updated quality-control requirements.
Technically speaking, the Fannie Mae guidelines do not require that updated ("refreshed") credit checks be performed for borrowers. Fannie Mae states that "It is the lender's responsibility to develop and implement its own business processes to support compliance with Fannie Mae's requirements on loans delivered to [Fannie Mae]." But, in the same memo, Fannie Mae does provide "tips for lenders to consider." One of those tips is "Refreshing a credit report just prior to closing … ."
Does anyone think that a lender who sells its loans to Fannie Mae is going to ignore such tips? Hardly.
The tips point out that not only might a refreshed credit report show newly-acquired debt (as in the example), but also that it may show new credit inquiries. "Credit inquiries listed on the credit report should be investigated to determine whether the borrower did in fact open additional credit resulting in repayment obligations." Don't go buy a new car until after you close.
Given recent history, it would be unreasonable to fault Fannie Mae for tightening up its procedures in every way possible. Buyers just need to remember that loan approval is based on statements of income and liabilities at the time of the loan application. If those factors change materially prior to closing, it is likely to be discovered and it could undo a deal.
Congratulations on your new home, and go ahead and buy new furniture; but wait until after escrow has closed.