New Debt Could Affect your Mortgage Terms

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Freddie Mac and Fannie Mae are requiring lenders to scrutinize borrowers' credit behavior before and after they apply for a loan.

By Kenneth R. Harney February 6, 2011

Reporting from Washington — for the LA Times
New credit transparency standards imposed on lenders by mortgage giants Freddie Mac and Fannie Mae could affect your mortgage deal. As of Feb. 1, Freddie Mac began requiring lenders to dig back 120 days into your credit bureau files to detect any inquiries — signs of your applying for credit anywhere else — and then to check out whether any applications were approved. If they resulted in significant new debts, your lender might have to revise the terms or the rate you're being offered.

Meanwhile, Fannie Mae is requiring lenders to track or review your credit behavior after you've been approved for a mortgage but haven't yet gone to closing. That period often extends for 60 days or more. If inquiries pop up on your files during this time, lenders must check them out to determine whether any new debt might require a re-underwriting of the originally quoted terms.

For example, if the mortgage quote is tied to specific debt-to-income ratio maximums — say 31% of monthly income for housing, 43% for total household debt — a new credit card account with a $5,000 balance might require a new underwriting or even a higher rate. If the new card account shows up late in the game — a day or two before closing, with moving vans on the way — you could face some serious problems.

"We now tell our customers that they need to be ready" for much more rigorous screening of their credit, said Matt Jolivette of Associated Mortgage Group Inc. in Portland, Ore. "[Fannie and Freddie] want to know everything."

This means full disclosure on any credit accounts, big or small, that consumers have shopped for in the months immediately before and after their application.

"Our advice is this: Don't buy cars, don't buy furniture or appliances on credit until we close," Jolivette said. "You don't own the house yet, so don't buy anything for it" unless you pay in cash.

The stricter credit-scrutiny rules from Freddie and Fannie have stimulated an explosion of new services and products to help lenders keep track of their mortgage clients' behavior. For example, Experian — one of the three national credit bureaus — sells a "risk and retention triggers" system that functions much like the anti-identity theft services it markets directly to consumers. Lenders can choose from a detailed menu of trigger-event occurrences that they wish to know about from the application date to the closing date. These include all new inquiries for bank credit cards, retail credit accounts, auto loans and even "over-limit" features borrowers apply for on existing accounts. The monitoring is 24/7.

Equifax, another of the big three credit bureaus, offers a similar service called "u

ndisclosed debt monitoring." Steve Meirink, an Equifax vice president, said there has been "a tremendous response" from banks and mortgage companies interested in signing up for its program.

Other players in the credit industry offer mortgage lenders customized "refresh" pulls of files and scores that compare a borrower's data at the application and just before the scheduled closing. Marty Flynn, president of Credit Communications Inc. of San Ramon, Calif., urges clients to pull "triple merged" files from all three bureaus — TransUnion, Experian and Equifax — because information on file can differ from bureau to bureau.

Freddie Mac's new 120-day look-back rule on inquiries is designed to turn up situations in which home buyers apply for credit a couple of months before seeking a mortgage, but the inquiry and new account haven't hit the national bureau files because of differing reporting schedules followed by creditors. By scanning back 120 days — the previous standard was 90 days — virtually all inquiries made during the four months preceding the application should show up. If they're not caught then, they are certain to be spotted during the scans or refresher reports obtained before closing.

The bottom line on all this: Be aware that your credit files — not just your FICO scores — are probably being checked, rechecked and evaluated for the third of a year preceding a mortgage application and two to three months prior to the closing. The cleaner and simpler you keep the files, the easier your path to an on-time, uncomplicated closing should be.

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