The Loan Quality Initiative can make second credit report derail closings

The Loan Quality Initiative is a mortgage loan quality control measure that was enacted June 1 to cut down on Fannie Mae foreclosures. In most cases the Fannie Mae Loan Quality Initiative requires lenders to pull a borrower’s credit report a second time at closing. If the borrower has applied for credit given that the mortgage loan was approved, then the resulting change could squash the deal.

Resource for this article: Loan Quality Initiative – second credit report can derail closings By Personal Money Store

The initiative for the Fannie Mae Loan Quality

Fannie Mae’s Loan Quality Initiative means that all lenders can be checking up on mortgage borrowers until the day they close. People who extend their credit to buy a new washer-dryer or furniture for their new home might be in for a rude surprise.

Lou Barnes, a mortgage banker in Boulder, Colo., told smartmoney.com that the initiative will probably "blow up an unknown number of closings because of mistaken or ambiguous findings in new credit reports."

Debt-to-income ratio is the key

It was reported by Smartmoney.com that applying for credit of any type between the date of the loan approval and closing could snag the deal. The new lines of credit might very well affect the borrower’s debt-to-income ratio — the percentage of monthly gross income used to pay monthly debts is a primary tool lenders use to determine loan eligibility. Additional debt could push the borrower over Fannie Mae’s debt-to-income ratio threshold of 45 percent.

Mortgage loan quality being controlled

Boston.com reports that many lenders already pull second credit reports right before the closing, but the Fannie Mae Loan Quality Initiative makes this mandatory for all mortgage lenders who sell their loans to Fannie Mae. New loan quality control actions require all of the lenders not only to pull two credit reports for each mortgage transaction but to also perform additional verifications of a borrower’s plans for the property, plus Social Security numbers and Individual Taxpayer Identification Numbers, among other changes. These last minute credit checks could result in a closing delay, pricing adjustment or, at the very, very worst, loan approval cancellation.

How a second credit report hurts

The Loan Quality Initiative gives lenders the freedom to verify nevertheless they choose. But a mortgage blogger reports that most will pull another credit report just prior to closing. Three things will be looked for by underwriters:

1. The credit report will show credit card bills. Those numbers will be replacing all of the original numbers. If the debts exceed Fannie Mae’s threshold, the loan will be denied.
2. Updated the credit score. If the FICO has dropped below minimum lending standards, the loan will be denied, or be subject to a new loan-level pricing adjustment. Loan level pricing adjustments are mandatory loan fee that are depending on the credit score.
3. The credit report's Credit Inquiry section. They want to make sure no credit is being borrowed anywhere else. This data can be used by underwriters however they want.

Fannie Mae foreclosures overwhelming

The Loan Quality Initiative is a huge try by Fannie Mae to stem the tide of foreclosures overwhelming the nation’s largest mortgage buyer. Fannie Mae reported an $11.5 billion loss within the first quarter of 2010. The US treasury was asked by Fannie Mae to give them $8.4 billion to stay afloat. Fannie Mae and its sibling Freddie Mac own or guarantee a lot more than 50 percent of mortgages within the United States. Mortgage foreclosure statistics reached an all-time high in the first quarter of 2010. The combined share of foreclosures and also the mortgage delinquencies was 14 percent, or about one in each and every seven U.S. mortgages. Mortgage foreclosure statistics are expected to peak this year with borrowers losing their homes each and every day.

Additional data at these websites

Smartmoney.com
smartmoney.com/Personal-Finance/Real-Estate/borrowers-beware-the-second-credit-report/
Boston.com
boston.com/realestate/news/blogs/renow/2010/05/fannie_maes_loa.html
Bob Phillips
southorangecounty.wordpress.com/2010/06/08/fannie-mae-loan-quality-initiative/