They know what you bought last summer — if you put it on credit

Since the housing crisis of the 2000s, mortgage lenders have been especially circumspect about a buyer’s credit activity — both during the application process and immediately before funding a loan. Lenders now routinely track an applicant’s newly acquired debt using pre-closing credit monitoring programs. Any scent of new debt may trigger a trip back through the underwriting department, jeopardizing the close.

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Small lenders fear QM

Buyers are often unaware of lenders’ real-time scrutiny. In anticipation of becoming a new homeowner, buyers take out store lines of credit to pay for furniture or appliances. But doing so before the loan closes might result in the buyer walking in to some bad news from their lender. Undisclosed debts have a high chance of being discovered in the underwriting process, adding to the risk of the loan falling through.

first tuesday insight

A good credit score doesn’t go as far as it used to. We know too well what happens when lenders pay no attention to credit scores.  But today, the average credit score on declined loans is 670 for Federal Housing Administration (FHA)-insured loans and 724 for conventional loans. This is dramatically above today’s minimum credit scores for FHA-insured loans, 580, and for conventional Frannie loans, 620.

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Origination Insight Report May 2013 from Ellie Mae

More telling is the average debt-to-income ratio (DTI) of 23/35 for recently closed loans. The minimum DTI set by the FHA, Fannie and Freddie is around 33/45, but few lenders are willing to make that loan.

After spending the last decade handing out credit (ARMs) to everyone with a pulse, lenders have switched to paranoia. The result: today they essentially spy on their borrowers and keep mortgages out of the hands of those who actually qualify. For an economic system built on an individual’s future earning power, the current level of lender imposed austerity is backward, punitive and regressive.

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Your credit’s not welcome here

The Fed encourages mortgage lending by providing money to lenders for next to nothing. This is why we’ve suggested the Fed go negative on interest rates and begin charging lenders a fee to hold excess reserves. But they won’t; it’s too politically sensitive. The Fed just doesn’t have a strong enough backbone to take that battle on.

Agent advice

Remember, you are your buyer’s best shot at getting it right. Marshal all the resources you have to advise your buyer so they understand what they need to do — and not do – to close the loan. Advise your clients to avoid taking out any loans or lines of credit from the time of application through the close of escrow.

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FARM Letter: What to know about your credit score

Stay tuned for an upcoming first tuesday article on other actions your clients can take to dodge this pulling-credit-at-closing trend.


RE: Lenders balk when mortgage applicants even inquire about taking on additional debt from The Washington Post