After going back and forth on the idea of lenders conducting closing day credit checks on new homebuyers, Fannie Mae (Stock Quote: FNM) has decided not to make its lenders conduct a last-minute credit check on new mortgage loans. But that doesn’t mean homebuyers are off the hook — Fannie has other ideas that may be just as strict.
Last-minute credit checks are just one tool that both government-backed lenders like Fannie Mae and private lenders like banks use to guarantee that borrowers haven’t taken on any new debt since they were first approved for a mortgage loan. Any big red flags, like a mortgage applicant taking out a car loan or loading up on credit card debt, may be enough for a lender to change their minds and reject the borrower’s bid for a home loan.
Thus it’s critical for home loan borrowers to sit tight between the original credit pull and the home mortgage closing date. A “quiet” debt period may be the homebuyer’s best insurance against losing their mortgage, and quite possible, their dream home.
So at first glance, the news from Fannie Mae that a second credit check is off the table might cause homebuyers to exhale. The announcement from the agency put to rest talk of a second credit check, but that doesn’t mean that Fannie Mae isn’t going to hold both borrowers and private mortgage lenders accountable for any new debt incurred closer to a home mortgage closing.
"Every mortgage loan delivered to Fannie Mae has to be underwritten to establish that the borrower is able to repay the debt," Deborah Slade-Horsey, Fannie Mae's vice president for single-family risk policy, told the Associated Press on Aug. 13.
The clarification from Fannie Mae does allow lenders the discretion to pull a second credit report; it just doesn’t require them to do so. But the home mortgage giant does encourage private lenders to avail themselves of “monitoring” services from credit reporting firms like Equifax (Stock Quote: EFX), which alerts clients to any big activity in a loan applicant’s credit report. If a lender misses a new auto loan or a new credit card from a mortgage applicant, Fannie Mae reserves the right to kick the loan back to the original issuer — a potential revenue risk for banks and other mortgage lenders.