Buyers waiting to close on a mortgage should avoid doing anything that might change their credit picture until after the documents are signed and the money is delivered.
Borrowers may assume that the lender is satisfied with their financial status once their loan has been approved. But since 2010, Fannie Mae has required lenders to recheck a borrower’s credit right before closing the mortgage. And if new liabilities pop up, the loan may be delayed or even canceled.
“We tell our clients about this upfront, and keep reminding them through the entire process not to go buy a new bed or a refrigerator,” said Michael Daversa, the president and founder of Atlantic Residential Mortgage, which is based in Westport, Conn. “What you’re supposed to do is keep everything status quo.”
It seems reasonable enough that if you’re buying a home, you might want to buy a flat-screen television in time for move-in day. But if your purchase shows up as a new credit card account with a $3,000 balance, the loan might be sent back to underwriting in order to redo the calculations, Mr. Daversa said. A new loan could potentially have a higher interest rate.
Mortgage lenders are also on the lookout for new credit inquiries. A credit inquiry from, say, Toyota signals that the borrower is probably in the process of buying a car — making the kind of large purchase that is another red flag.
Such purchases just before closing may not affect the loan status of the most creditworthy borrowers, said David Stein, the chief operating officer and a partner of Residential Home Funding, which is based in White Plains. Borrowers with high debt-to-income ratios, and therefore tighter finances, are the ones who need to be careful.
The maximum debt-to-income ratio allowed by Fannie Mae is 45 percent (meaning that a maximum 45 percent of your gross monthly income can go to cover debt, mortgage and housing expenses).
“It’s more of an issue for people on the cusp of approval where they just get in under the wire,” Mr. Stein said. “If someone was a 44 percent at the approval, if they incurred more debt at the credit refresh, and the debt goes over 45, we can’t close that loan.”
Mr. Stein has also seen the credit recheck cause problems for working couples when only one spouse is named on the loan, usually because the other spouse has a low credit score. Basing the loan on one spouse’s income instead of two means the lender will see a higher debt-to-income ratio. In reality, the couple may easily be able to afford buying new furniture, but because the bank isn’t seeing both incomes, a rise in debt could still cause problems with their loan before the closing.
To avoid any last-minute problem, Mr. Stein advises that all borrowers check with their loan officer before taking on any new debt.
Borrowers should also be aware that lenders now routinely reverify their employment status just before closing. This has long been a standard practice in the industry, but it fell by the wayside when the housing market was hot and mortgages were a lot easier to come by, Mr. Stein said.
Now that it is once again routine, borrowers cannot expect to hide a job loss or change of employment from their lender.
A borrower should immediately alert his or her loan officer of any change in job status. Further, Mr. Stein says, if a borrower’s employer is being subsumed into another company, and the company name will no longer match the name on the borrower’s loan application, that, too, should be reported to the lender in order to avoid delays at closing time.