Fannie Nixes 'Closing Day' Credit Checks


After going back and forth on the idea of lenders conducting closing day credit checks on new homebuyers, Fannie Mae (Stock Quote: FNM) has decided not to make its lenders conduct a last-minute credit check on new mortgage loans. But that doesn’t mean homebuyers are off the hook — Fannie has other ideas that may be just as strict.

Last-minute credit checks are just one tool that both government-backed lenders like Fannie Mae and private lenders like banks use to guarantee that borrowers haven’t taken on any new debt since they were first approved for a mortgage loan. Any big red flags, like a mortgage applicant taking out a car loan or loading up on credit card debt, may be enough for a lender to change their minds and reject the borrower’s bid for a home loan.

Thus it’s critical for home loan borrowers to sit tight between the original credit pull and the home mortgage closing date. A “quiet” debt period may be the homebuyer’s best insurance against losing their mortgage, and quite possible, their dream home.

So at first glance, the news from Fannie Mae that a second credit check is off the table might cause homebuyers to exhale. The announcement from the agency put to rest talk of a second credit check, but that doesn’t mean that Fannie Mae isn’t going to hold both borrowers and private mortgage lenders accountable for any new debt incurred closer to a home mortgage closing.

"Every mortgage loan delivered to Fannie Mae has to be underwritten to establish that the borrower is able to repay the debt," Deborah Slade-Horsey, Fannie Mae's vice president for single-family risk policy, told the Associated Press on Aug. 13.

The clarification from Fannie Mae does allow lenders the discretion to pull a second credit report; it just doesn’t require them to do so. But the home mortgage giant does encourage private lenders to avail themselves of “monitoring” services from credit reporting firms like Equifax (Stock Quote: EFX), which alerts clients to any big activity in a loan applicant’s credit report. If a lender misses a new auto loan or a new credit card from a mortgage applicant, Fannie Mae reserves the right to kick the loan back to the original issuer — a potential revenue risk for banks and other mortgage lenders.

For borrowers, the best preventive medicine is to act as if their mortgage lender will take a second look at their credit report. That means no auto loans, no new credit checks and no opening new credit cards (or abusing existing ones).

In the end, make sure your “quiet period” between the time when your original credit report was pulled and the time you close your home loan (anywhere from one to three months) is exactly that: quiet.

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