For those of us who work with home buyers and mortgage lenders routinely, it has been clear for a long time that mortgage underwriters were getting more cautious — and rightfully so. More thoughtful review of borrowers’ qualifications a few years ago would have prevented the mortgage crisis we have experienced in the past two years.
Last minute credit checks have become fairly common, and I have even seen employment verification redone after closing. (If the borrower’s employment situation changed since the previous verification, this could have prevented funding — obviously an “awkward” issue after both buyer and seller have completed all the other steps in conveying a home.)
Effective June 1, 2010, Fannie Mae has instituted their own “Loan Quality Initiative,” aimed at identifying undisclosed debt. This initiative requires that lenders making loans that will be sold to Fannie Mae must pull an up-to-date credit report within 3 days before closing. If the borrower’s credit situation has changed, or there are debts that were not properly disclosed at the time of original loan application and processing, the result could be higher fees and/or interest rate, or the loan could denied altogether!
This specific program is required for Fannie Mae loans, but given all the changes in the mortgage industry it is worth anticipating similar requirements for virtually all new loans — to be sold to Freddie Mac or insured by FHA or guaranteed by VA. Undisclosed debt is a critical issue in defaults on all kinds of mortgage loan.
To help prevent this and other related surprises, this summary of the Top 10 Credit Don’ts is an important document.