Buyers Should Be Careful About Credit Use Prior to Closing

by Bob Hunt

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.

By: Terry Sheridan

Published 2010-06-02 08:37:43

Most buyers will expect a home inspection, including a form outlining what the inspection revealed. Image: Library of Congress/ Prints & Photographs Div./FSA-OWI/LC-USF35-629

Make your house FHA-friendly, and it will appeal to more homebuyers. Why? Because the Federal Housing Administration is insuring the mortgage loans used by about 30% of today’s homebuyers.

If your house passes the FHA rules, it will appeal to buyers who plan to use an FHA-insured mortgage. If your house doesn’t qualify for an FHA loan, you’re cutting out 30% of potential buyers.

FHA is especially important to first-time homebuyers and those with small downpayments because it allows borrowers with good credit to make a downpayment as low as 3.5% of the purchase price.

Here’s how to make your home appealing to FHA borrowers:

Know the FHA loan limits in your area

Start by checking to see if your home’s listed price falls within FHA lending limits for your area. FHA mortgage limits vary a lot. In San Francisco, FHA will insure a mortgage of up to $729,750 on a single-family home. In the White Mountains of New Hampshire, the loan limit is $271,050.

Home inspections

Most buyers will ask for a home inspection, whether or not they’re using an FHA loan to buy the home. You must give FHA buyers a form explaining what home inspections can reveal, and how inspections differ from appraisals.

How much do you have to repair?

If the home inspection reveals problems, FHA will not give the okay to buy the home until you repair serious defects like roof leaks, mold, structural damage, and pre-1978 interior or exterior paint that could contain lead.

Dealing with FHA appraisers

Help the lender’s appraiser by providing easy access to attics and crawl spaces, which usually must be photographed, says appraiser Frank Gregoire in St. Petersburg, Fla.

Your buyer can hire his own appraiser to evaluate your home. But FHA only relies on reports by its approved appraisers. If the two appraisals conflict, the FHA appraisal preempts the buyer’s appraisal.

Help with FHA closing costs

Most FHA buyers need help with closing costs, says mortgage banker Susan Herman of First Equity Mortgage Bankers in Miami. So a prime way to make your house FHA-friendly is to help with those costs.

FHA currently allows sellers to pay up to 6% of the sales price to help cover closing costs, but is considering lowering that limit to 3% in the fall of 2010. 

If you’re selling a condo

FHA also has to approve your condo before a buyer uses an FHA loan to purchase your unit. Be sure your condo is FHA-approved for mortgages. The list has been updated, so if your association was approved a year ago, check again to make sure it’s still on the approved list.

FHA generally won’t insure loans in condo associations if more than 15% percent of the unit owners are late on association fees. Ask your property manager or board of directors for your association’s delinquency rate.

Other rules cover insurances, cash reserves and how many units are owner-occupied and the types of condos that can be purchased with an FHA mortgage.

FHA sometimes issues waivers for healthy condominiums that don’t meet the regular rules. If your condo isn’t FHA-approved, it doesn’t necessarily have to meet every single rule to gain approval. Ask your REALTOR® to consult with local lenders about getting an FHA waiver for your condo if it doesn’t meet all the requirements.

FHA also limits its mortgage exposure in homeowners associations. With some limited exceptions, no more than 50% of the units in an association can be FHA-insured.

FHA loans for planned-unit developments

FHA no longer requires lenders to review budgets and legal documents for planned-unit developments.