A Credit Check That Could Cost You a Home

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More and more lenders, led by Fannie Mae, are insisting on a new mortgage loan wrinkle – a second credit check just before you sign on the dotted line. Here’s what you need to know to protect yourself from a potentially troublesome double down on your credit check.

The issue stems from Fannie Mae’s (Stock Quote: FNM) newly enacted Loan Quality Initiative that went into effect June 1. The LQI is particularly threatening to homebuyers who make big purchases or take on more debt just before their home purchase closes.

At the center of the issue is a mandate in the LQI that lenders conduct a “second pull” on a buyer’s credit to ensure that there won’t be any payment problems once the mortgage kicks in. The policy is a direct response to lax lending standards in the past that have fueled an alarmingly high number of home mortgage delinquencies over the past few years. The second pull is designed to discover if a home borrower has garnered more debt between the date of the mortgage loan application and the date of the home purchase closing.

According to the Mortgage Banker’s Association, the national home mortgage delinquency rate is 10.1% in the first quarter of 2010 — up from 9.5% in the fourth quarter of 2009 (the MBA uses seasonally adjusted figures to calculate the delinquency rate). The MBA also says that some states are inundated with troubled homeowners: Florida, for example, has almost 14% of its mortgages in foreclosure, while Nevada has a rate of 10%.

Mortgage industry observers claim that the second credit check could result in delayed closings, higher mortgage rates or even outright cancellation if the credit check reveals some major issues.

Unfortunately, many homebuyers assume the deal is clinched before the closing, and go out to Lowes (Stock Quote: LOW) to buy a sit-down lawnmower or to La-Z-Boy (Stock Quote: LZB) for a new couch and chairs. Or, they apply for a new credit card or an equity line of credit to help pay for their new home’s upkeep.

These are all big no-nos in the eyes of FNMA. Realistically or not, they want to see the opposite happening — home borrowers who shun new debt and reserve their funds to pay off their mortgage.

What’s your strategy on second pulls? It’s not rocket science. Hold off on any applications for new debt until after the home deal is closed. That’s especially true for traditional credit check “red flags” like new credit cards and new car loans.

Above all, don’t take anything for granted — and know that lenders will be increasingly vigilant about second credit checks.  Fannie Mae spokesperson Janis Smith says that mortgage lenders "will have to look for things like new credit accounts, increased credit lines, increased balances on existing accounts, undisclosed or newly recorded liens, second mortgages — anything that may have changed since initial application that might impact a borrower's debt-to-income ratio."

The good news is that now you know the new reality of second credit pulls. Keep it in mind before you start spending before you have the keys to your new home in your hand.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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