Can You Stop Yourself?

This is a reprint of an article by Kenneth Harney
of the Washington Post, a syndicated columnist
who often writes about real estate and financing
issues.


If you're thinking about applying for a home mort-
gage later this spring, here's some important news:
Beginning June 1, your lender is likely to order a
second full credit screening immediately before
closing.

The last-minute credit report will be designed to
find out whether you've obtained -- or even
shopped for -- new debt between the date of your
loan application and the closing. If you've made
applications for credit of any type -- for furnish-
ings and appliances for the new house, a car,
landscaping, home equity line, new credit card,
you name it -- the closing could be put on hold
pending additional research by the lender.

If you've actually taken out new loans that are
sizable enough to affect the debt-to-income
ratio calculations used in your original mortgage
approval, the whole deal could fall through. The
added debt load could render you ineligible for
the mortgage because you suddenly appear
unable to handle the payments without a strain
on your household budget.

The June 1 changes are part of a new effort by
mortgage giant Fannie Mae to cut down on
slipshod underwriting by lenders and frauds by
borrowers. Fannie's so-called "loan quality
initiative" will require lenders not only to pull
two credit reports for each mortgage transaction
but to perform additional verifications of borrower
occupancy plans for the property, Social Security
numbers and Individual Taxpayer Identification
Numbers, among other changes.

"There's an almost irresistible urge" for many
mortgage borrowers, said Don Unger, CEO of
Advantage Credit Inc. of Evergreen, Colo. "The
lender says, 'OK, you're approved for the loan,'
and you immediately think about shopping for
all the things you need for the house. You go to
Home Depot" or other major retailers "and you
put in an application."

In the past, that might not have raised an eyebrow
-- or even been detected. But under the new double-
check policy, when the Home Depot application shows
up as a "hard" or borrowerinitiated inquiry on a credit
report, said Unger, the lender "is going to have to
contact" the merchant and determine whether credit
was extended, in what amount, and how this might
affect the applicant's home financing transaction.

Marc Savitt, president of the National Association of
Independent Housing Professionals and a mortgage
broker in Martinsburg, W.Va., said it's not an uncom-
mon scenario. "Most often the new debt involves
furniture or other goods for the house," said Savitt.
"However, we have seen debt for new cars and other
major purchases."

Terry Clemans, executive director of the National
Credit Reporting Association, recalls one case where
homebuyers "went out and gorged on $40,000 worth
of new furniture and all types of stuff" following their
loan approval -- involving monthly payments far
beyond what they could possibly afford. Under the
new policy, they'd likely be shot down before closing.

Fannie Mae spokesperson Janis Smith said that lenders
"will have to look for things like new credit accounts,
increased credit lines, increased balances on existing
accounts, undisclosed or newly recorded liens, second
mortgages -- anything that may have changed since
initial application that might impact a borrower's debt-
to-income ratio."

As a practical matter, some lenders are likely to ask
their credit reporting vendors to perform the actual
investigations when new debts or inquiries pop up
on borrowers' files. Fannie Mae's instructions say that
"lenders must determine that all debts of the borrower
incurred or closed up to and concurrent with the
closing" are considered in the final loan analysis.

Unger, however, said all this may not be as straight-
forward as it sounds. For example, if the credit report
is pulled immediately before closing to comply with
the "up to and concurrent" requirement, there may
not be sufficient time to check out inquiries -- especi-
ally those where no actual drawdown of debt has been
reported to the national credit bureaus. He also
questioned whether entire loan packages might need
to be re-underwritten -- a timeconsuming process --
based on credit data discovered at the 11th hour.

In that event, poof goes your closing.

How should homebuyers and refinancers prepare
for the new credit check procedures?

Lenders and credit reporting company executives
say everybody needs to follow just one basic rule:
Abstinence. Between your application for a mortgage
and the date of closing -- which might be a span of
45 days to 60 days or more -- resist the irresistible.

Don't apply for new credit unless you discuss it in
advance with your lender and you get a green light.