…And it’s all Fannie Mae’s fault.
The Loan Quality Initiative
Now, we all know Fannie Mae doesn’t create any loans. Instead, it purchases loans from different banks and turns them into securities backed by mortgages. It is therefore in Fannie Mae’s best interest to make sure all the loans it buys are up to its standards. That way, the quality of their securities is guaranteed.
This is exactly what happens when your loan is approved for closing– it (most likely) meets Fannie Mae’s standards. We say “most likely” because in the past, Fannie Mae had to conduct an audit on its loans after the rate of foreclosures began to rise year on year. It discovered that some loans weren’t underwritten according to it guidelines which put its security business at risk and affected their profits.
The Loan Quality Initiative was created to reduce the number of “bad loans”. The initiative has an incredibly wide scope. For the banks it buys from, it adds extra precautions (read: paperwork) to the underwriting process. Now, details like occupancy and social security numbers need to be validated which of course takes more time.
At this point you might be wondering what all this has to do with you. Unlike Fannie Mae, you don’t need to be concerned about how the banks make loans. You only need to be concerned about one thing–your credit rating.
Your Credit Is Pulled Up Again Just Before You Get The Funds
Under the Loan Quality Initiative, lenders need to verify credit ratings again just before they close to make sure nothing has changed. This means that although your lender has looked at your credit profile and given you the okay, Fannie Mae will need them to take another look–just to be sure nothing has changed.
These extra checks ensure that loans are given at the right price, and are funded based on your risk at the close of the application, rather than at the open. Many loans take some time to process and a lot can change in that time especially if the borrower knows they have gotten past the first hurdle of approval.
All this means that you have to be extra careful to make sure nothing affects your credit score while your loan is processing. Here are some of the questions they will be asking when they re-pull your credit rating:
- Have you applied for any new sources of credit (eg credit cards) while your loan was processing?
- Have you maxed out any of your existing credit cards while your loan was in process?
- Have you taken any vehicle financing while your loan was processing?
- Have you made any other major purchase while your loan was in process?
- Have you taken on any debts that you haven’t disclosed while your loan was processing?
If the answer is yes to any of these questions, your lender’s alarm bells will immediately start to go off. Your final credit profile needs to match your original credit profile, otherwise your mortgage might need to be underwritten again and worse still, your application could be rejected. You definitely don’t want to go through all the trouble of getting your finances in order at the beginning of the application, only to get denied at the end because you made a bad decision.
The 3 Things Your Lender Will Look At When Your Credit Is Re-pulled
So far, we’ve explained what the Loan Quality Initiative is, why Fannie Mae needs banks to re-pull credit profiles just before closing and what that means for you. It’s easy to avoid putting yourself in a bad situation if you know exactly what the lenders do when they go through your credit. Here are 3 of the most important items and how the lender will react to them:
The bank will: Use your new minimum payment to calculate your DTI (debt-to-income ratio) again. If it is larger than Fannie Mae’s maximum DTI allowance, the mortgage will be rejected.
You should: Ensure you are not running up credit cards before your loan is approved. Give yourself extra insurance by paying more than the minimum required where possible.
The bank will: Compare your new credit score to Fannie Mae’s minimum credit score criteria. If yours falls below this number, the price of your loan might change, or your loan could be denied altogether.
You should: Pay all your bills on time, avoid taking on unnecessary debt and avoid looking for new credit while your loan is processing to avoid reducing your credit score. You can keep an eye on your credit rating by requesting an analysis from a local mortgage loan officer…
The bank will: Check the ‘Credit Inquiry’ section of your credit profile to see if there are any undisclosed liabilities. If they find anything, they will request documentation to support the inquiry and use this information to underwrite your mortgage again.
You should: Not look for new credit until the funds from your loan are in your account. I repeat, do not look for new credit until your loan is fully funded.
Remember that all this happens after your loan has technically been approved. Nothing is final until the loan is funded, so you want to do all you can to protect your credit score. Avoid buying anything on any kind of credit during this time. That credit offer on the new sofa or lease on your second car can wait.
Getting Your Loan Funded Is Hard, But It Can Be Done.
Fannie Mae’s Loan Quality Initiative has indeed reduced the number of “bad loans” it buys. Unfortunately, this has also meant that more mortgage applications have been rejected even after reaching ‘cleared to close’ status.
We wouldn’t want you to be another casualty of the Loan Quality Initiative, so make sure you are extremely careful with your credit from the time your application opens until the time it is closed. If you really can’t avoid making a big purchase, pay in cash, or consider waiting till after your application is closed.
Haven’t Applied? Find a Mortgage With Low Rates
If you apply for one of Fannie Mae’s loans, then you have to meet the requirements of Fannie Mae’s Loan Quality Initiative. There are other options out there; you can apply for USDA loans, VA loans, jumbo loans or FHA mortgages which all have different requirements. Even if you don’t go for a Fannie Mae loan, it’s still a smart idea to keep your credit rating high while your loan is being considered.
The first step is to arrange a mortgage strategy session with a qualified loan officer. You can do so here