On February 1, 2011, Freddie Mac began requiring lenders to look back 120 days into homebuyers’ credit bureau files to see if any other credit applications were submitted — and approved — prior to their current loan application. If any new debts show up in their investigation, the lender may revise the previously-offered terms or rate.

Fannie Mae is now requiring lenders to monitor the credit of homebuyers after they are approved for a mortgage, but before they close. During this period, lenders may re-underwrite the originally quoted terms if they spot any red flags.

Homebuyers can prepare for the more extensive credit screening by waiting to make big purchases on credit until closing.

first tuesday take: The new extensive credit screening by Fannie and Freddie comes as no surprise. As consumer protection efforts are increasing, the government, through its ownership of Fannie and Freddie, is taking steps to ensure they are only guaranteeing thoroughly investigated loan applications with terms and an interest rate a homeowner can pay. [For more information regarding stricter lending policies, see the January 2011 first tuesday article, Homebuyers will see stricter lending policies in 2011.]

Nobody wants a repeat of the Great Recession, but lenders must realize the economic downturn has left the majority of California homebuyers with tarnished credit and oversized debts. This additional security measure may prevent most potential homebuyers — those who were foreclosed on — from being approved until new jobs and full-time employment returns to pre-recession levels, probably around 2016. [For more information regarding California unemployment, see the January 2011 first tuesday Market Charts, Jobs move real estate and Reeling from California unemployment.]

Moving forward, agents and brokers can prepare their homebuyers by discussing the advantages of cutting down spending, building up savings and borrowing nothing else up to four months before submitting a loan application. Homebuyers who anticipate the lender investigation will have less-expensive closings, and their selling agents will be much happier campers.

Re: “New debts could affect your mortgage terms” from the LA Times