Loan Quality Initiative: second credit report can derail closings

Sunday, January 5th, 2014 By

An illustration in reference to the percentage of interest on a home loan

The Loan Quality Initiative is a measure by Fannie Mae to reduce mortgage foreclosures. The measure could derail many real estate closings. Flickr photo.

The Loan Quality Initiative is a mortgage loan quality control measure enacted  June 1 to cut down on Fannie Mae foreclosures. In most cases the Fannie Mae Loan Quality Initiative requires lenders to pull a borrower’s credit report a second time at closing. If the borrower has applied for credit since the mortgage loan was approved, the resulting change in the debt-to-income ratio could squash the deal.

The Fannie Mae Loan Quality Initiative

Fannie Mae’s Loan Quality Initiative means lenders will be checking up on mortgage borrowers until the day they close. People who extend their credit to purchase a new washer-dryer or furniture for their new home could be in for a rude surprise.

Lou Barnes, a mortgage banker in Boulder, Colo., told smartmoney.com that the initiative will probably “blow up an unknown number of closings because of mistaken or ambiguous findings in new credit reports.”

Debt-to-income ratio is the key

Smartmoney.com reports that applying for credit of any type between the date of the loan approval and closing could snag the deal.The new lines of credit could affect the borrower’s debt-to-income ratio — the percentage of monthly gross income used to pay monthly debts is a primary tool lenders use to determine loan eligibility. Additional debt could push the borrower over Fannie Mae’s debt-to-income ratio threshold of 45 percent.

Mortgage loan quality control

Boston.com reports that many lenders already pull second credit reports right before the closing, but the Fannie Mae Loan Quality Initiative makes this mandatory for all mortgage lenders who sell their loans to Fannie Mae. New loan quality control measures require lenders not only to pull two credit reports for each mortgage transaction but to perform additional verifications of a borrower’s plans for the property, plus Social Security numbers and Individual Taxpayer Identification Numbers, among other changes. These last minute credit checks could result in a closing delay, pricing adjustment or, at worst, loan approval cancellation.

How a second credit report hurts

The Loan Quality Initiative gives lenders the freedom to verify however they choose. But mortgage blogger Bob Phillips reports that most will pull another credit report just prior to closing. Even after the loan has been approved, underwriters will be looking for three things:.

  1. The updated credit report will show current credit card bills and minimum monthly payments.  Those numbers will replace the original numbers made at the time of application.  If the debts exceed Fannie Mae’s threshold, the loan will be denied.
  2. The updated credit score. If the FICO has dropped below minimum lending standards, the loan will be denied, or be subject to a new loan-level pricing adjustment. Loan level pricing adjustments are mandatory loan fee based on the credit score.
  3. The credit report’s Credit Inquiry section. The goal is to see if the borrower has been applying for credit elsewhere. Underwriters can use this information at their discretion.

Fannie Mae foreclosures overwhelming

The Loan Quality Initiative is an attempt by Fannie Mae to stem the tide of foreclosures overwhelming the nation’s  largest mortgage buyer. Fannie Mae reported an $11.5 billion loss in the first quarter of 2010. In May, Fannie Mae asked the U.S. Treasury for an infusion of $8.4 billion to stay afloat. Fannie Mae and its government-controlled sibling Freddie Mac own or guarantee more than 50 percent of mortgages in the United States. Mortgage foreclosure statistics reached an all-time high in the first quarter of 2010. The combined share of foreclosures and mortgage delinquencies was 14 percent, or about one in every seven U.S. mortgages. Mortgage foreclosure statistics are expected to peak this year with more than 2 million borrowers losing their homes.

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