You’ve gone to your lender and been approved for a home mortgage. You’ve found the home of your dreams. But just when you are about to close, the lender says you are no longer approved. What happened?
Since the infamous “mortgage meltdown” a few years back, lenders as well as industry regulations have gotten much stricter. The latest tightening of the screws comes from Fannie Mae. The mortgage titan's Loan Quality Initiative, which went into effect June 1, requires lenders to track "changes in borrower circumstances" between application and closing. While these rules aren't new, Fannie is enforcing them more vigorously.
The new rules simply want to ensure the new home loans are deemed “low risk” for default or buyback. Basically, lenders want to be assured that this is the type of borrower that has the ability to repay this loan in full. With the increase in regulation and scrutiny over any changes, even seemingly small changes can implode your pending mortgage.
Following are three things borrowers can do to mess up their next mortgage closing.
Get a new credit card or auto loan
Get a new credit card or auto loan, and you could find yourself no longer approved for that mortgage loan.
Lenders have long admonished mortgage applicants to avoid getting new credit cards and auto loans while home loans are in underwriting. Fannie's Loan Quality Initiative adds urgency to this request.
For example, picture a borrower who gets a car loan a week before closing on the mortgage. The mortgage lender doesn't know about it. Later, the borrower misses a couple of mortgage payments.
Fannie Mae can look back, discover the undisclosed auto loan and make the lender buy back the bad mortgage. That's a money loser for the lender.
So at the eleventh hour, most lenders check credit for new accounts.
Even merely opening an account -- without charging anything to it -- can be a mistake.
Charge up credit cards
Charging up credit cards with thousands of dollars' worth of appliances, tools and yard equipment is another surefire way to muck up a closing. It's best to leave those cards alone.
Don't increase your credit card balances at all. Mortgage approval is based partly on debt-to-income ratio. The lender looks at the borrower's minimum monthly debt payments and compares them to income. If the ratio of debt payments to income is too high, the borrower could be turned down for a mortgage.
Fannie encourages mortgage lenders to recalculate debt-to-income ratios just before closing. If a spending spree sends the debt-to-income ratio too high, the mortgage could be doomed. For this reason, borrowers should wait until after closing the mortgage before buying furniture, a refrigerator or a lawn mower on credit.
Changing jobs is another good way to derail a mortgage before closing. Other potential deal-breakers include staying with a current employer, but switching from a salaried position to one where primary income comes from commissions or bonuses.
Any slight change in income could cause you to not qualify.
The main thing to remember is, keep everything exactly the same as the day you got approved. No new car. Don’t apply for a credit card so you can get brand new furniture. And definitely don’t change your job.