New Credit Practices When Buying A Home

Home buyers need to be aware that it is a bad idea to increase or open new lines of credit shortly before they close on their new home. They should avoid all types of credit activity during the period of time between loan application and closing. New Fannie Mae guidelines, which began June 1, 2010, suggests that lenders run an additional borrower's credit report just prior to their loan closing.

Fannie Mae's Loan Quality Initiative was introduced on February 26, 2010. The information stated 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. Usually 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 loan delivery.

Borrower qualifications were not the only issues 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.

The Fannie Mae guidelines do not "require" that updated credit checks be performed for borrowers. Fannie Mae states it is the lender's responsibility to develop and implement its own business processes to support compliance with Fannie Mae's requirements on loans. Yet in the same memo Fannie Mae provides "tips" for lenders to consider. You guessed it one of those tips involves running a credit report just prior to closing. In today's environment does anyone think that a lender who sells its loans to Fannie Mae is going to ignore such a tip? Highly unlikely.

The tips point out that not only might a refreshed credit report show newly acquired debt 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.

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.