It has been described as a “financial colonoscopy” on your credit! Fannie Mae and Freddie Mac are now requiring lenders to recheck and review a borrower’s credit profile after they have been approved for a mortgage but haven’t yet gone to closing. That period can extend back as far as 120 days. If any new credit “inquiries” or new debts pop up on the borrower’s credit file during this time, lenders must check them out to determine whether any new debt might require a re-underwriting of the originally approved and quoted terms. Underwriters have been advising that some transactions have been having problems right at the funding process, because borrowers are not being coached properly before or during the loan process about this new rule.
Buyers need to be informed correctly about their credit
Freddie Mac’s new 120-day look-back rule on inquiries is designed to turn up situations where home buyers apply for credit a couple of months before seeking a mortgage but the inquiry and new account haven’t hit the national bureau files because of differing reporting schedules followed by creditors. By scanning back 120 days — the previous standard was 60-90 days — virtually all inquiries made during the four months preceding the application should show up. If they’re not caught then, they are certain to be spotted during the scans or refresher reports obtained before closing.
This current economic crisis has created even tougher guidelines and credit requirements for borrowers, and there are some things that consumers must be aware of when they are in the process of getting their loan. Here is a list of 4 Credit do’s and don’ts during the loan process to use as a reference, so borrowers can fully understand just what they should and should not do before or during their loan process, as some of these things can unknowingly wreak havoc on a transaction.
4 Don’ts to adhere to until the loan funds
1. Don’t – Apply for new credit until the loan funds
Many borrowers still think it is OK to apply for lines of credit or credit cards during the loan process because they will need more available money upon the closing of their loan to furnish the home etc. Applying for credit cards can cause a borrowers credit score to drop if they apply for several different cards or allow their credit to be pulled by different credit card companies. So the simple solution is to advise the borrower not to apply for anything until after closing.
2. Don’t – Allow multiple credit checks
Borrowers should not be having multiple credit checks pulled by different lenders. I have heard recently of borrowers allowing other lenders to pull their credit a few weeks into the transaction because someone else said they could get a lower rate, and they even had their rate locked at another lender. Once a borrower has given a lender commitment and especially after a loan is locked, they need to stick with that lender.
3. Don’t – “Shop” for new credit before closing (Furniture, cars, etc)
Borrowers need to know that it is not “ok” to shop for credit or buy any new furniture before closing. Many will be excited to go to Jerome’s etc and pick out new furniture for their new home and then get talked into allowing their credit to be pulled by some salesman, because he told them if they apply today they will qualify at 0% interest for 5 years. Picking out the furniture etc is fine, but they will need to qualify for the actual purchase after the loan has funded. Once again this can cause a borrower’s credit score to drop and affect their funding.
4. Don’t – dispute anything on a credit report
Did you know that Fannie Mae and FHA have a new rule whereby they cannot fund a loan if there is a disputed account on a borrower’s credit report, even if this is a $10 medical bill charge. If a borrower needs to dispute something, they need to do this after the loan funds. If they plan on paying or settling collection accounts they need to do this after funding otherwise this can cause the credit scores to drop.
4 Do’s to adhere to before loan funding
1. Do – Disclose all Debt—even if it did not show up on your credit report
Many times underwriters will find additional debt a borrower did not disclose on their application. Perhaps they just bought a car or a jet ski but the payment does not show up on their credit yet. Or they took out a loan against their 401k and it just popped up at closing on their pay stub. These new payments could easily ruin a borrowers closing once it is factored into their debt to income ratios and suddenly they don’t qualify anymore.
2. Do – Explain or document all inquiries on your credit report
Borrowers need to explain or document everything that pops up on their credit report profile. Write letters of explanation for any inquiries that occurred during the loan process. If they were inquiries because they were shopping for a mortgage loan then have this written in a letter to the underwriter. If there was an inquiry at Jerome’s and they were just “shopping for credit” and did not buy anything, make sure they tell the underwriter that they did NOT purchase anything. If they did buy something they need to disclose this, because the underwriter will find out.
3. Do – Communicate everything with your loan officer and agent
Borrowers must understand that they need to communicate everything to their loan professional and Real Estate Agent if it relates to their finances. For example a borrower maybe embarrassed to talk about an emergency loan they had to give a family member and they used a cash advance to give the cash to the family member, then the underwriter pulls their credit before closing and finds a new charge of $5k on their Chase card. If this is disclosed upfront then we have time to factor this into their loan ratios and determine if the loan will still qualify.
4. Do – Pay all bills on time and follow up for confirmation
This is an obvious one, but extra care should be taken to make sure all bills are paid on time during closing and also followed up on to make sure the payments were received and processed on time. Sometimes a creditor may not have received their check in the mail or posted the payment late. I had a client who had not missed a mortgage payment in 7 years and was buying an investment property a few months ago, the lender never got the check and posted a 30 day late on her credit..it only showed up on the lenders credit because my credit was from the previous month, needless to say the loan died.
Providing a Do’s & Don’ts credit checklist upfront
In today’s loan process, extra attention needs to be given to a borrowers credit to ensure they understand the ramifications of their actions during the loan process. To make sure my clients are getting coached correctly and are held accountable, I hand out a “Do’s and Don’ts checklist” at the beginning of the application process that clients are told to follow until their loan funds. This ensures that they fully understand what they need to do to make sure their loan funds, and that the funding of the loan is also in their hands and that they are to be held accountable for their own actions and their credit.
I hope you found the information useful in this article. Feel free to contact me directly at 858-200-9602 if you have any questions or run into any problems with any of these issues above. I look forward to chatting soon.