It’s a great time to buy a home. With the real estate crash, prices are way down and mortgage rates have never been lower. But if you are not careful, a new rule recently enacted by Fannie Mae could end your homeownership dreams.
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Effective June 1, Fannie Mae implemented what it calls the Loan Quality Initiative (LQI). LQI is designed to ensure that the mortgage loans purchased by Fannie Mae comply with its underwriting requirements. Of particular importance to homebuyers, LQI requires mortgage companies to double-check your financial information right before closing.
Among other things, they will do what is called refreshing your credit report to check for new debt or a lower credit score. Thus, even though you may have been approved for the loan a month or two earlier, changes in your finances could cause the mortgage company to delay or deny your loan just as you are about to close on the home.
So what does this all mean? Basically, you want to avoid four main things before closing on your new home.
1. Say no to new credit: For starters, you don’t want to get new credit cards, a car loan, or other forms of credit. Both the credit report inquiries prompted by the credit application and the new debt will show up on your credit report when the mortgage broker refreshes your report just before closing. If the new debt significantly lowers your credit score or increases the amount of your monthly debt payments, your mortgage could be denied. And even if the loan isn’t denied, closing could be delayed while the mortgage company reassesses the new information.
2. Don’t charge up existing credit: Buying a new home often leads to additional debt in other areas. For example, many people buy new furniture on credit in anticipation of moving into a new home. Others borrow money to help pay for repairs or improvements of either a home they are trying to sell or their new home. Whatever the reason, this new debt results in higher debt, a higher debit-to-income ratio, and possibly a lower credit score. When the lender rechecks your financial information before closing, these negative marks could result in a denied mortgage application.
3. Don’t change jobs: You also want to avoid a change in your job status or income if at all possible. While sometimes a job change is out of your control, it’s best to avoid a voluntary change in job status or income until your home purchase has been finalized. Loss of income before closing will raise your debt-to-income ratio, which could result in an adverse credit decision. At a minimum, a new job likely will require the mortgage company to re-verify job status and income, which could delay your closing.
4. Don’t hurt your credit score: Finally, avoid other actions that could lower your credit score. For example, make sure to pay your credit cards, car loans, and other bills on time and try to keep your credit card debt well below your credit limit. Here it’s important to note that how new credit, a late payment, or other potentially negative marks will affect your credit score depends in part on what your credit score is to start with. As a result, if you must take an action that could lower your credit score, talk to your mortgage broker first to discuss alternative options and the affect your decision could have on your mortgage application.