June 1, 2010: Fannie Mae to Require 2nd Credit Report pulled on day of closing...
Fannie Mae just released another round of lending guideline changes that affect all lenders in the U.S. who underwrite loans to agency guidelines. The most significant change is that lenders will be required to provide a 2nd credit report pulled on the actual closing day - prior to the loan funding. HUD may follow suit with a similar requirement for FHA-insured loans in the near future as they tend to mirror many agency guidelines.
This new last minute credit check will apply to all conventional loans.
Any newly discovered accounts will trigger re-underwriting of the loan which has the potential to delay the closing. Any credit inquiries which appear as a result of shopping for or applying for new credit will stop the loan closing in its tracks until the buyer provides documentation that proves no new debt was obtained. Again, delays in closing will be inevitable with some buyers.
What Fannie Mae has discovered by combing through the records of all of the homes they have foreclosed on over the past 24 months is that many home buyers had gone out and incurred additional debts after their lender pulled the initial credit report. After closing, homeowners were becoming late on payments that were traced back to new debt that was found to have been incurred during the 30-60 window of time it takes to process the loan application and close escrow. A significant amount of audit results find that a great number of home loans would not have become as delinquent or required foreclosure.
How to manage things so that delays in closing are avoided:
• Always refer to a correspondent lender such as Primary Residential Mortgage who can deal with this issue at the closing stage entirely internally.
• Borrowers must be informed of this new change in national lending requirements and instructed to NEVER go out and apply for credit while the home financing process is active. There is a huge temptation by home buyers to go shopping for appliances, furnishings and home improvement items. Simply applying for a Home Depot credit card and not using it will force an underwriter to add 5% of the high credit limit to the bottom line total monthly payments - yes, even if the card is not actually active yet.