Last Minute Credit Reports: Fannie Mae's new "Loan Quality Initiative"

Remember when lenders would pull a last-minute credit report before the loan closed just to make sure you hadn't incurred new obligations after your loan was approved? Well, maybe you don't. But that used to be the case. As a result, we mortgage folks got in the habit of forbidding clients from making any new purchases after we had pulled credit for a loan application. In the past few years we have become less vigilant about this because lenders were not requiring a last-minute credit pull. Well guess what. It's back!

Fannie Mae announced a new Loan Quality Initiative designed to help reduce the alarming increase in "repurchase requests" (that's where they make us buy the loan back) resulting from things like new car loans that didn't show up until after the loan closed. According to an Equifax analysis, up to $142 million in car loan payments were missed during underwriting in 2009, resulting in loans applications that were substantially misrepresented and in loans which the borrowers were incapable of repaying.

"As part of the Fannie Mae Loan Quality Initiative, mortgage lenders will have to meet additional guidelines to ensure that the borrower has the propensity and capacity to repay a debt. For loan applications dated on or after June 1, 2010, Fannie Mae will require lenders to verify at pre-funding that borrowers have not incurred new debts or liabilities that may affect their ability to fulfill a mortgage payment obligation. If additional credit was obtained up to the funding date, a borrower must be re-qualified with the monthly payment included in the debt-to-income calculation. Any debts or liabilities incurred during this period, which are not reflected on the credit report or disclosed in the final loan application, may subject the lender to the risk of loan repurchase."

We may even be required to directly contact any creditor who has inquired recently into your credit to determine if there are pending obligations not yet appearing on your credit report. So caveat emptor: once your credit has been pulled for a mortgage application, do NOT apply for, accept, borrower against, or make any new purchases on credit without first talking with your lender.