Credit Report Round Two Could Stop Your Home Loan Approval
Mortgage applicants, particularly when they are buying their first home, often choose to celebrate their excitement over the home loan approval and home purchase by rushing out to buy new furniture or sometimes even a new car to go along with the new home. In today’s tightened credit atmosphere, it is best to rein in the spending spree, at least until after settlement.
Part of the new Fannie Mae initiative requires any lender that sells its mortgages to Fannie Mae (about 40% of the market for mortgage loans in the first quarter of 2010) to check to see that borrower liabilities are checked up to the closing date. Many lenders are opting for a second credit report as a way to fulfill this obligation.
For consumers who have been approved for a home loan for a mortgage refinancing or a home purchase, the simplest way to avoid a denial just before closing is to make sure they do not make a major purchase or apply for new credit during the period between the loan approval and the closing date.
Keep a Close Eye on Debt Before Closing a Home Loan
There are two main reasons to avoid extra spending. First, your debt-to-income ratio could change so that you can no longer qualify for the loan. Fannie Mae mortgage loans typically require a maximum debt-to-income ratio (your monthly minimum payments compared with your monthly gross income) of 45%. For example, if your income is $10,000, a 45% ratio would mean that you spend $4,500 on debt obligations. If you buy new appliances on credit before your closing, you could find yourself with a debt-to-income ratio over the limit. Applying for new credit cards could also trigger a further investigation by the lender to make sure you still meet the loan requirements.
The second reason to avoid spending just before your mortgage refinance or home loan goes to settlement is that your credit score could be impacted. A lower credit score could mean that you no longer qualify for the same interest rates.
Careful monitoring of your spending and your credit score can forestall any problems getting to the settlement table. If your new home loan is denied before settlement, a purchaser could lose their deposit. Borrowers refinancing a home might just be stuck with their current loan until they can start the refinancing process again.
