Beginning June 1, 2010, Fannie Mae's "loan quality initiative" (LQI) requires that lenders pull two credit reports for every mortgage originated. The first one will be used to underwrite your mortgage and also to provide a mortgage quote (because your rate is partly determined by your credit score). The second report is to verify your score just before drawing up your loan documents and funding your mortgage.
How LQI may affect your mortgage loan rate
Certain credit activity during this mortgage loan processing interval may force your loan rate higher, or even prevent you from closing the loan. Lenders are typically wary of newly-opened credit accounts, increased balances on existing accounts, increased limits on credit lines, inquiries indicating an application for new credit, new derogatory information, and previously undisclosed or newly recorded liens.
Anything that might indicate an increase in your debt-to-income ratio (DTI) will be followed up, and your application may be sent back to underwriting to see what terms you qualify for, or indeed if you still qualify at all.
Three things to avoid prior to closing
- Do not falsely claim primary occupancy. Fannie Mae has discovered in its audits that many mortgages underwritten for primary residences were actually taken against second homes or investment properties. Borrowers presumably try to claim primary occupancy because guidelines are more liberal for primary homes, and mortgage rate quotes are lower. But trying to obtain a primary-occupancy loan on a second property is mortgage fraud, and mortgage fraud is a felony. Verification of occupancy status may involve checking with utilities, moving companies, your insurance providers, and even third-party investigators.
- Don't try to secretly buy two homes at once. Lenders will also be required to make sure that you haven't taken on or even applied for additional mortgages, generally by checking with the Mortgage Electronic Registry System (MERS). They'll be required to verify your identity by double-checking your Social Security or Individual Taxpayer Identification Number, contacting the Social Security Administration if necessary to resolve discrepancies.
- Don't go on a borrowing spree. If your credit score has dropped "materially" prior to closing, your loan will have to go back to underwriting and may be repriced as well. Anything that triggers additional investigation or a trip back to the underwriters can cost you - your purchase may fall through, or you could lose the mortgage rate lock on your refinance. And repricing could be particularly expensive: a twenty-point drop on your credit score could cost you thousands of dollars in fees and interest over time.
It's not hard to avoid eleventh-hour mortgage derailment. Pay your bills, don't lie on your application, and don't apply for credit or add to your debt. Period. All too commonly, people react to getting their mortgage approval by going on a shopping spree. The new home needs new furniture. The new yard needs landscaping. The new garage needs a Porsche. Avoid these temptations, and you can always buy presents for your new house later.