photo compliments of veggiefrog via Flickr

Effective on loan applications taken on June 1, 2010 or later, Fannie Mae is requiring lenders to confirm that undisclosed liabilities are not present prior to funding a transaction as part of their Loan Quality Initiative (LQI).   Currently a credit report is pulled and is valid for a specific amount of time–as long as the transaction closes prior to the expiration of the credit report, it typically is not repulled.   Fannie Mae is now requiring the lender to make sure that there is no new or undisclosed credit at closing.   Relying on the original credit report pulled at application is no longer good enough.

Fannie Mae’s FAQs suggest these tips for lenders to help confirm there are no undisclosed liabilities:

• Retrieving a refreshed credit report just prior to the closing date and reviewing it for additional credit lines.
• Utilizing new vendor services to provide borrower credit report monitoring services between the time of loan application and closing.
• Direct verification with a creditor that is listed on the credit report under recent inquiries to determine whether a prospective borrower did in fact obtain credit or enter into a financial arrangement that is not disclosed on the loan application.
• Running a Mortgage Electronic Registration System (MERS) report to determine if the borrower has another mortgage that is being established simultaneously.

This means days before funding a Fannie Mae loan, the transactions are subject to being re-underwritten and if the borrower is “borderline” (which is a 620 mid-credit score in today’s climate and/or higher debt-to-income ratio) or decides to purchase their appliances for their new home before closing…they could potentially “kill” their deal and find themselves being “unapproved”.

Fannie Mae states that loans should be resubmitted to underwriting if:

• additional debts have been incurred which would increase the debt-to-income ratios
• if new derogatory information is detected
• if the credit score has materially changed

Borrowers should understand that the loan application is intended to represent their financial scenario and whenever (even before LQI) changes are made to their application, their mortgage originator needs to know.   This is not new.   When changes occur and a borrower is aware (such as taking on more debt or changing their employment) and they hope they “won’t get caught” before closing, they’re committing fraud.   This is what Fannie Mae is trying to prevent with LQI.

Borrowers with conventional financing need to be extra mindful of LQI.   Using a credit card to fill your SUV full of gas could potentially ding your score if you’ve carry a balance of 30% or more of the available credit limit.   Even closing a credit card during or just before a transaction could drop your score low enough to where the lender may have to reconsider your loan approval AT CLOSING.

For mortgage companies and banks (anyone who sells loans to Fannie Mae)  it boils down to having to refresh, repull or face re-purchasing the loan if changes to the credit report are found between application and funding.    Fannie Mae is not specifically requiring credit reports be repulled prior to funding–they are holding the lender responsible for changes if they don’t.

Borrowers, real estate agents and originators need to be prepared for potential delays in closing, repricing of their mortgage loan (which would trigger another delay due to MDIA) or the loan potentially being denied.   It’s more important than ever that borrowers work closely with a qualified mortgage professional who can help guide them through the process.