When is “allowed to close” do not does “allowed to close” mean? When Fannie Mae is involved is when.
Fannie Mae’s “Loan Quality Initiative”
Fannie Mae doesn’t do loans. Instead, it buys loans from banks and securitizes them into mortgage-backed securities. As such, Fannie Mae wants to ensure that every loan it buys meets its basic underwriting standards. In this way, he can guarantee the quality of his titles.
And, when we talk about loan approvals, that’s actually what happens; your loan is underwritten based on Fannie Mae guidelines. Loans approved for closing are – presumably – meeting Fannie Mae’s minimum standards.
We say “likely” because when foreclosures started to rise last decade, Fannie Mae began an audit of its loans and found a large number of mortgages that had failed to meet its standards. Some loans, he found, were grossly underwritten, including his securities and net income.
To limit “bad debts”, Fannie Mae created its Loan Quality Initiative.
The Loan Quality Initiative is broad in scope and comprises 9 pages. For banks, this creates “additional steps” in underwriting. It is the validation of things like social security numbers and occupation of the borrower. These are small tasks, but time-consuming, and there are many of them.
As a mortgage applicant, you don’t have to worry about what the bank is doing. You have only one task: do not waste your credit.
Just before financing, your credit will be withdrawn
The Loan Quality Initiative requires lenders to recheck credit profiles just prior to closing and look for changes. In other words, although your credit was withdrawn at the start of the subscription, Fannie Mae wants your bank to withdraw it again – just in case something changes.
This ensures loans are priced correctly and funded at the risk of the borrower at closing as opposed to upon request; because many things can change while a loan is in progress. Especially when the loan is for a concluding purchase in 60 days or more.
Banks will withdraw your credit before closing. Some of the things they look for include:
- Did you apply for new credit cards while your loan was in progress?
- Did you use existing cards while your loan was in progress?
- Did you finance an automobile while your loan was outstanding?
- Did you make another major purchase while your loan was in progress?
- Did you add any undisclosed debts while your loan was in progress?
Each of the above items is a red flag for underwriting. If your “final” credit report does not match your original credit report, your mortgage may be subject to a full re-underwriting and, in the worst case scenario, a loan application denial.
The 3 credit hotspots for outstanding loans
The loan quality initiative is quite simple and a matter of common sense. As a mortgage applicant, it’s easy to avoid its clutches. There are 3 things an underwriter looks for in your credit report.
Here are these 3 elements how the bank will react.
What the bank will do: Recalculate the debt-to-income ratios using your “new” minimum payments due. If the DTI exceeds Fannie Mae’s maximum threshold, the loan will be denied.
What should you do about it: Do not accumulate credit cards before closing time, even for items set aside. Consider paying more than the minimum due, just in case.
What the bank will do: Use your new credit score to assess loan-level price adjustments or outright denials when scores are below Fannie Mae’s minimum credit score requirement.
What should you do about it: Follow the basic rules to keep your credit score high – pay your bills, don’t let things go into collection, and don’t seek new credit unless necessary. Click here to get your credit scores.
What the bank will do: Check the Credit Inquiry section of your credit report to look for “undisclosed liabilities.” If any items are found, the bank will request supporting documentation from the investigation and use this information to re-underwrite your mortgage.
What should you do about it: Do not seek new credit until your loan is funded. Period. Now read that first sentence again, please, to help it sink in.
And remember – it all happens after your loan has reached “final approval” status. You must protect your credit throughout the financing. Don’t buy new furniture on credit the day before you move in; or buy a car for this new garage.
Loan approvals difficult, but not impossible
Fannie Mae launched its Loan Quality Initiative to improve the overall performance of its loan pool. Better loan quality helps keep mortgage rates in line and reduce the burden of bad loans on taxpayers. It’s two big wins.
Unfortunately, the Loan Quality Initiative can also lead to additional mortgage denials and broken closings.
Therefore, pay close attention to your credit between your application date and closing. If you Homework buy something big, consider paying cash or wait. large purchases on your credit card may be grounds for revoking an approval.
Even if your loan is authorized until closing.
Apply for a mortgage with favorable and low rates
The Fannie Mae Loan Quality Initiative applies only to Fannie Mae loans. It does not apply to FHA mortgages, USDA loans, VA loans, or jumbo loans. However, it’s always a good idea to keep your credit clean while your loan is in progress.
To get started with a purchase closing or refinance, start with a mortgage rate.
The information contained on The Mortgage Reports website is provided for informational purposes only and does not constitute advertising for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent company or affiliates.