Don’t Spend Money Before Your Loan Closes
If you’ve qualified for a conforming mortgage loan, there’s important information you need to know. Your loan, rate and terms are not set in stone – if you make any financial changes, you could put your loan at risk or risk having to pay a higher interest rate.
A conforming loan is one that participating banks offer that meets guidelines required by the government-sponsored entities (Fannie Mae, Freddie Mac) to purchase the loans for resale on the secondary market. In other words, the bank loans you money to buy a home. It then sells your loan to Fannie Mae or Freddie Mac that buy loan packages as investments. That allows the bank to make new loans, keeping the mortgage lending market fluid. Otherwise, there would only be a small finite number of mortgage loans that a bank could make and few people would be able to buy a home.
But there’s a caveat. The loans that go into the loan packages have to meet the lending guidelines and standards set by Fannie Mae and Freddie Mac. Those guidelines include how much income vs. debt the borrower has.
Income, down payment sources, consumer debt, court-ordered child support, liens, home appraisal and any other factors that could influence a borrower from repaying the loan is carefully monitored under the Uniform Mortgage Data Program (UMDP).
The UMDP implements Fannie Mae’s 2010 Loan Quality Initiative (LQI), a means of collecting updated electronic appraisal and loan data. The LQI electronic data processing is designed to help the bank catch “undisclosed liabilities,” or discrepancies between the loan origination data and the loan package that Fannie Mae receives after closing and resale.
While the compliance requirements are directed toward banks and appraisers, consumers can also be affected by credit and eligibility standards. Banks identify undisclosed liabilities by retrieving a refreshed credit report just prior to the closing date and reviewing it for additional credit lines. That means banks will retrieve your credit report at least twice - once to okay the loan, and again to make sure you still qualify for a conforming loan.
Simply put, the bank watches for changes in your financial situation. If a loan doesn’t conform to the LQI, it can’t be sold. If a lender can’t sell the loan, it doesn’t want to make the loan and carry it on its books.
Here’s an example. Your lender may warn you not to make any purchases on your credit cards until after your home purchase closes. But you decide that you can’t move into your new house without new furniture. Depending on your income-to-debt ratio, that new living room or bedroom suite may change your credit score enough to disqualify you for a conforming loan. Your loan, even though you were pre-approved, is canceled by the bank. How does the bank know?
The LQI “requires lenders to determine that all debts of the borrower, including those incurred during the loan application process, are disclosed on the final loan application and included in the borrower qualification.”
In addition, the LQI has vendor services to “provide borrower credit report monitoring services between the time of loan application and closing” as well as “direct verification with a creditor that is listed on the credit report under recent inquiries to determine whether a prospective borrower did in fact enter into a financial arrangement with the creditor, which may not be listed on the loan application.”
The bank can also run a Mortgage Electronic Registration System (MERS®) report to determine if the borrower has undisclosed liens or another mortgage is being established simultaneously. With this array of tools to make sure your loan meets underwriting standards, the bank can proceed with or cancel your loan at any time.
Ask your lender what else you can do to make sure your loan stays on track.
Resist the urge to use your credit cards or open new lines of credit. Pay your card balances on time. It’s better to picnic on the floor than lose the chance to buy your home because you bought new dining room furniture.