February 19th, 2011 1:11 PM by Sherry Lee
WASHINGTON -- One loan officer describes it as a "financial colonoscopy" on your credit, and he suggests that anybody applying for a mortgage be prepared for it.
What he's talking about is the combined effect of new credit transparency standards that have been imposed on lenders by mortgage giants Freddie Mac and Fannie Mae. 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 mortgage deal could be affected, and 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 percent of monthly income for housing, 43 percent 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, who made the reference to a "financial colonoscopy." "They (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 preceding and following their application.
"Our advice is this: Don't buy cars, don't buy furniture or appliances on credit until we close," said Jolivette. "You don't own the house yet, so don't buy anything for it" unless you pay in cash.
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