A little background: Fannie Mae stands for Federal National Mortgage Association. The federal government established Fannie Mae to expand the flow of mortgage money by creating a secondary market. Fannie Mae is a private, shareholder-owned company that works to make sure mortgage money is available for people in communities all across the USA. Even though it is a privately held company it is subject to the strict supervision by the U.S. Department of Housing and Urban Development (HUD). Since Fannie Mae purchases such a large share of the mortgages, it is responsible for the guidelines a majority of lenders use to qualify borrowers.
As of June 1st 2010 Fannie Mae is starting its Loan Quality Initiative which requires all lenders who sell mortgages to them on the secondary market to re-pull the buyers credit days prior to closing among conducting other verifications . This has implications for BOTH buyers and sellers. If the buyer(s) have incurred debt that wasn’t disclosed on the mortgage application or debt was taken out after the mortgage application was submitted, Fannie Mae wants to know. If this new debt pushes the important Debt to Income ratios to a point that is unacceptable by Fannie Mae, the loan could be denied!
How does this affect closing times? Lenders will be looking closely at new credit inquires on your credit report. If the buyer has been shopping for new furniture or a new car or signs up for a department store credit card … the mortgage lender is required to investigate if credit has been extended to you. This needs to be done by a 3rd party verification company and could take a few days to get a response back to the underwriter.
Is your earnest money at risk? It could be. Make sure you are working with a knowledgeable Realtor, who can explain the contract and your obligations based on the dates and deadlines. Above all don’t do anything that could change your credit prior to closing. Again, working with a knowledgeable Realtor and mortgage professional is the best thing you can do to protect your earnest money and get closed in a timely and stress free fashion.
Some lenders will only be “refreshing” your credit and looking at your trade lines and not the score itself. If a lender needs to pull a new report, those scores need to be used and if they are lower, it could effect your interest rate, terms, and qualifying for the loan itself.
Fannie Mae has seen a correlation with problem loans that had higher debt at closing then when the borrower initially applied for the loan. With this new loan quality initiative, they hope to reduce the amount of borrowers who get into trouble with their mortgages.
So now what? When applying for a mortgage, be sure to do the following:
* Be proactive. If you have taken, or plan on taking out new debt while in process of buying a home, be sure to let your lender know up front so that they can make sure it is used in your debt ratio. If you don’t have to take on new debt then please don’t.
* If you plan on using a line of credit for a down payment, make sure you let your lender know. Many borrowers use equity from a current home for another. Depending on the amount, this payment increase could be significant.
* Don’t allow creditors to pull your credit until after your mortgage transaction.
* Hold off on running out to the furniture or home improvement store. This should be done after you close.
This new policy has taken some in the mortgage industry by surprise, and lenders and third party verification companies are moving quickly to make sure they are compliant. So far, Freddie Mac has not adopted this policy but when one moves in a direction, the other usually follows. We will be watching for updates as Fannie Mae rolls out this new initiative. Make sure you are working with a mortgage professional who is well informed and hopefully LOCAL to Colorado if you are purchasing in Colorado.