PLEASE beware of the guideline change being made by FANNIE MAE which will, no doubt, be adopted by every lender across the board and will have an effect (adversely) on ALL of your clients if not managed up front. Fannie Mae has made several changes although the most significant change is the lenders will be required to provide a 2nd credit report pulled on closing day – prior to the loan funding.
How will affect you and your clients?
- Any newly discovered accounts will trigger re-underwriting of the loan – causing delays to funding
- Any credit inquiry which appear as a result of shopping for or applying for new credit will potentially stop the loan closing until documentation is provided proving NO new debt was obtained
- Any significant changes to credit card balances must be investigated (new monthly payment due to increased balance might be cause recalculation of debt-ratio)
How to manage things so that delays in closing are avoided:
- Always refer to a direct lender such as Service First Mortgage who can deal with this issue at the closing stage entirely internally. Our underwriting and funding is all done in the same building. Brokering a loan out to a wholesale lender will create a much longer delay in dealing with last-minute re-underwriting. Bad news for mortgage brokers.
- Borrower’s must be informed of this new change in national lending requirements and instructed to NEVER go out and apply for credit while the home financing process is active. There is a huge temptation by home buyers to go shopping for appliances, furnishings and home improvement items. Simply applying for a Home Depot credit card and not using it will force an underwriter to add 5% of the high credit limit to the bottom line total monthly payments – yes, even if the card is not actually active yet.
- Inform the seller and their agent of this new Fannie Mae requirement as soon as possible. Set expectations for the potential for needing a contract extension. Most borrowers are qualified to the point where a small increase in their monthly debts resulting from last-minute credit purchases would not necessarily mean the loan would be turned down. But a 24-48 hour delay to prove the fact could be an issue for some sellers.
- Make sure the loan officer is not in a “call center” or has little contact with the borrower. Using a loan officer with many years experience in the industry is very important as the process of completing a loan today is like being “married to the client financially” for a month or more. I am always re-assessing the circumstances of every client throughout the process so that any issues are anticipated and dealt with proactively. Communication is key to avoiding last-minute surprises.
Why the change?
What Fannie Mae has discovered by combing through the records of all of the homes they have foreclosed on over the past 24 months is that many home buyers had gone out and incurred additional debts after their lender pulled the initial credit report. After closing, homeowners were becoming late on payments that were traced back to new debt that was found to have been incurred during the 30-60 window of time it takes to process the loan application and close escrow. A significant amount of audit results find that a great number of home loans would not have become as delinquent or required foreclosure.
see the article/release from Fannie Mae here Fannie Mae Loan Quality Initiative